<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NO. 333-48723
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ASSET ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 874201 13-3888903
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
800 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 207-8786
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BRUCE H. LIPNICK
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
800 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 207-8786
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
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<S> <C>
RICHARD T. PRINS, ESQ. STUART H. COLEMAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP STROOCK & STROOCK & LAVAN LLP
919 THIRD AVENUE 180 MAIDEN LANE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10038
(212) 735-3000 (212) 806-5400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................... 8,855,000 shares $13.00 $115,115,000 $33,958.93(2)
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(2) $29,500 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 3, 1998
PROSPECTUS
[ASSET ALLIANCE CORP. LOGO]
7,700,000 SHARES
COMMON STOCK
All of the 7,700,000 shares of common stock, $.01 par value (the "Common
Stock"), offered hereby (the "Offering") are being sold by Asset Alliance
Corporation ("Asset Alliance" or the "Company"). Prior to the Offering, there
has been no public market for the Common Stock. It is currently anticipated that
the initial public offering price will be between $11.00 and $13.00 per share.
See "Underwriting" for information relating to the method of determining the
initial public offering price. The Common Stock has been approved for inclusion
on the Nasdaq National Market under the symbol "AACO."
The Company has been advised that certain existing stockholders (including
AJG Financial Services, Inc. and Frontier Insurance Group, Inc.) and certain of
their affiliates, which in the aggregate beneficially own 33.8% of the Common
Stock prior to the Offering, intend to purchase in the Offering, at the initial
public offering price, shares of Common Stock having a total purchase price of
$5.25 million.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF ALL MATERIAL
RISK FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1,500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,155,000 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------------
The shares of Common Stock are offered, subject to prior sale, when, as and
if delivered to and accepted by, the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about ,
1998 at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New
York 10167.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
, 1998
<PAGE> 3
PRO FORMA ASSETS UNDER MANAGEMENT BY INVESTMENT STYLE
AS OF MARCH 31, 1998
[Pie chart depicting assets under management by investment style on a pro
forma basis as of March 31, 1998. Pie chart indicates that event
driven/opportunistic, long/short equity, diversified arbitrage, stable value,
hedged mortgage-backed securities trading, diversified market neutral equity,
and convertible & merger arbitrage represented 24%, 21%, 21%, 18%, 10%, 4% and
2% of assets under management on a pro forma basis at March 31, 1998
respectively.
COMBINED HISTORICAL ASSETS UNDER MANAGEMENT OF THE AFFILIATED FIRMS
[A bar graph depicting assets under management on a pro forma basis at
December 31 of 1994, 1995, 1996 and 1997.]
[Footnotes: (1) A general footnote stating that "Pro Forma and combined
historical assets under management data give effect to the acquisition of
each of the Affiliated Firms including MET (the acquisition of which is
expected to be completed within 30 days following the Offering) as of each
date for which data is presented).
(2) A footnote to the Assets Under Management by Investment style pie chart
indicating that "Event Driven, Opportunistic" assets included are "Upon
completion of the acquisition of MET".]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Certain statements contained in this Prospectus constitute "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
statements in "Risk Factors" in this Prospectus constitute cautionary statements
identifying important factors, including certain risks and uncertainties, with
respect to such forward-looking statements that could cause the actual results,
performance or achievements of the Company to differ materially from those
reflected in such forward-looking statements. These forward-looking statements
speak only as of the date of this Prospectus.
<PAGE> 4
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. Except as otherwise
indicated, information in this Prospectus assumes (i) no exercise of the
Underwriters' over-allotment option and (ii) the conversion of all outstanding
shares of the Company's Series A Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock") and of all outstanding shares of the Company's
Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock")
into an aggregate of 1,875,000 shares of Common Stock and a warrant to purchase
175,000 shares of Common Stock, all of which will occur automatically upon
consummation of the Offering.
IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, THE INFORMATION FOR THE
COMPANY AS OF ANY DATE OR FOR ANY PERIOD ON OR AFTER DECEMBER 31, 1997 GIVES PRO
FORMA EFFECT TO EACH OF THE BRICOLEUR ACQUISITION, THE JMG-PACIFIC ACQUISITION
AND THE MET ACQUISITION (AS SUCH TERMS ARE DEFINED HEREIN) AND THE RELATED
FINANCINGS AS IF EACH SUCH TRANSACTION HAD BEEN COMPLETED AS OF SUCH DATE OR THE
BEGINNING OF SUCH PERIOD.
THE COMPANY
Asset Alliance is an investment management holding company organized on
February 1, 1996 to acquire preferred interests in privately owned investment
management firms specializing in alternative investment strategies ("Alternative
Managers"). The Company considers Alternative Managers to be those who use
hedging or other risk modifying strategies to seek higher risk adjusted rates of
return in various market environments. The Company generally purchases a 50%
equity interest in a given firm and is granted a preferred right to a comparable
percentage of the firm's gross revenues (the "Preferred Revenue Share"). Asset
Alliance's strategic focus is to acquire interests in established mid-sized
Alternative Managers with assets under management ranging from $50 million to
$500 million. Upon completion of the MET Acquisition (which is conditioned upon
the completion of the Offering), Asset Alliance will have acquired preferred
interests in six Alternative Managers with aggregate assets under management of
approximately $1.3 billion as of March 31, 1998. The Company's goal is to build
a large and diversified family of Alternative Managers each possessing a high
level of expertise in its chosen investment discipline.
The alternative investment management business is one of the fastest
growing segments of the domestic investment management industry. The Company
believes that the domestic alternative investment management business consists
of approximately 3,000 Alternative Managers with aggregate assets under
management in excess of $350 billion representing a compound annual growth rate
in excess of 38% since 1990. Moreover, the Company believes that global assets
committed to Alternative Managers also have increased significantly as foreign
investors have become aware of alternative investment strategies. Alternative
Managers generally manage investment funds or separate accounts for
institutional investors, high net worth investors and other investment funds.
Alternative Managers generally charge higher asset-based fees on their
assets under management than traditional investment managers and also are
entitled to annual incentive performance fees or profit allocations on
incremental positive performance. As a result, Alternative Managers with
positive performance historically have generated substantially more revenues per
dollar of assets under management at any given performance level than have
traditional investment managers. This higher level and dual source of revenues
is a distinguishing and attractive characteristic of the alternative investment
management business. The Asset Alliance acquisition structure enables the
Company to participate in this favorable revenue stream.
Asset Alliance has developed an innovative and flexible acquisition
structure which it believes aligns its strategic and financial goals with those
of the principals (the "Principals") of the Alternative Managers in which it
acquires an interest who are generally the key employees and owners of a
substantial majority of the equity of an Alternative Manager. As used in this
Prospectus, the term "Alternative Managers" refers to investment managers of the
type in which the Company is interested in acquiring interests, and the term
"Affiliated Firms" refers to those Alternative Managers in which the Company has
acquired or contracted to acquire an interest. Acquisitions ordinarily are
structured to allocate all net income of an Affiliated Firm, after
3
<PAGE> 5
payment of the Preferred Revenue Share to Asset Alliance, to the Principals,
thereby permitting them to participate in the future growth of the Affiliated
Firm in which they retain a significant ownership position and creating
incentives for them to increase revenues and assets under management. As
Affiliated Firms increase revenues, the Company's income from its Preferred
Revenue Shares also will increase. Principals participate in and are encouraged
to further the growth of the Company through ownership of Common Stock or Common
Stock equivalents received as part of the consideration for the Preferred
Revenue Share. Principals also may be eligible to receive incentive options to
purchase Common Stock if the Affiliated Firm achieves specified revenue goals.
Asset Alliance has actively encouraged and now generally requires the Principals
to provide for orderly succession in the management and ownership of the
Affiliated Firm in order to realize the value of their retained ownership
positions. Asset Alliance itself does not provide Principals with a buy-out of
their remaining ownership interest in the Affiliated Firm.
Day-to-day management of the Affiliated Firms is delegated to the
Principals. Asset Alliance, however, retains rights of consent on major matters.
In addition, Asset Alliance has the right to appoint 50% or more of the members
of the management board of certain of the Affiliated Firms, and has the right to
appoint up to all of such members in the other Affiliated Firms, although the
exercise of the right to appoint up to all such members could, except in limited
circumstances, result in substantial payments to the affected Principals. The
Principals of each Affiliated Firm retain full investment discretion with
respect to their firm's assets under management. Asset Alliance provides
expertise with respect to marketing and distribution services, strategic
planning and administration, as well as back-office support and systems. The
Company seeks to provide new product development services for the Affiliated
Firms, including the integration of existing investment products and the
distribution of new products that incorporate the investment strategies of
several Affiliated Firms. The Company also actively introduces the Affiliated
Firms to new sources of capital and new markets for their investment products
which can result in access to long-term investment capital. Asset Alliance's
marketing and operational support enables the Principals to focus to a greater
extent on their primary expertise -- portfolio management. See "Business --
Growth Strategy -- Product Development and Marketing/Operational Support."
The Affiliated Firms have grown rapidly in terms of revenues and assets
under management since their respective inception dates. On a combined basis for
the Affiliated Firms, total management and incentive performance fees have grown
from $2.9 million for the year ended December 31, 1994 to $46.9 million for the
year ended December 31, 1997, representing a compound annual growth rate of
approximately 153%, while total assets under management have grown from $363
million as of December 31, 1994 to $1.3 billion as of March 31, 1998,
representing a compound annual growth rate of 48%. On a pro forma basis for the
year ended December 31, 1997 and for the three months ended March 31, 1998, the
Company had gross revenues of $25.6 million and $7.4 million, respectively,
amortization of intangibles of $9.9 million and $2.5 million, respectively,
operating expenses of $8.7 million and $1.9 million, respectively, net (loss)
income of ($207,000) and $752,000, respectively, EBITDA* of $17.5 million and
$5.7 million, respectively, and EBITDA as adjusted** of $10.9 million and $3.5
million, respectively. On a historical basis for the year ended December 31,
1997 and for the three months ended March 31, 1998, the Company had gross
revenues of $7.9 million and $2.8 million, respectively, amortization of
intangibles of $201,000 and $315,000, respectively, operating expenses of $7.2
million and $1.8 million, respectively, net income of $564,000 and $410,000,
- ---------------
* 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 additional acquisitions 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.
** EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization, extraordinary items and
amortization of original issue discount on the Company's subordinated
convertible debentures. The Company believes that this measure may be useful
to investors as another indicator of funds available to the Company, which
may be used, among other things, to make additional acquisitions and repay
debt obligations. 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.
4
<PAGE> 6
respectively, EBITDA of $1.3 million and $1.2 million, respectively, and EBITDA
as adjusted of $852,000 and $745,000, respectively.
The alternative asset management business as a whole remains highly
fragmented and generally is characterized by entrepreneurial organizations which
are often heavily or entirely dependent on the investment management,
operational and marketing skills of a small group of individuals. Asset Alliance
believes that principals of Alternative Managers will increasingly seek out an
organization such as Asset Alliance which can provide them with substantial
benefits, including the realization of a portion of the value of their firms,
the framework for succession planning and the diversification of risk while
allowing for continued day-to-day operational control of their firms with
increased marketing and administrative support. Accordingly, Asset Alliance
believes that significant opportunities exist for future growth of the Company
through the acquisition of preferred interests in additional Alternative
Managers. See "Business -- Industry Focus" and "Business -- Growth Strategy."
Asset Alliance believes it is well positioned to take advantage of the
opportunities in the alternative asset management market because of (i)
management's experience in the alternative asset management business, (ii) the
development of a strong list of potential acquisition targets, (iii) its
experience in acquiring Alternative Managers, (iv) its innovative acquisition
structure and its marketing and operational support capabilities, (v) its
strategic relationship with Arthur J. Gallagher & Co. ("AJG Co."), the fifth
largest insurance broker in the world and a long time participant in the
alternative investment management industry, from which Asset Alliance has
obtained not only significant financial backing, but also, under employment
agreements with Asset Alliance, the services of two of Asset Alliance's
executive officers and directors, who also are employees of AJG Co., and (vi)
the quality of the Affiliated Firms in which the Company has already acquired a
preferred interest and of their Principals. The Company believes that the
Offering increases the Company's ability to acquire Alternative Managers by
providing additional capital for such acquisitions and by establishing a trading
market for the Common Stock, which will enhance the attractiveness of the Common
Stock and Common Stock equivalents as part of the consideration for such
acquisitions.
------------------------
The Company was incorporated in the State of Delaware in 1996. Its
principal executive offices are located at 800 Third Avenue, New York, New York
10022, and its telephone number is (212) 207-8786.
------------------------
5
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RECENT AND PENDING ACQUISITIONS
The Company's principal means of implementing its growth strategy is
through the acquisition of preferred interests in Alternative Managers. During
1996 and 1997, the Company acquired two existing Alternative Managers and
established one new Alternative Manager in partnership with an experienced
investment manager (an "Experienced Manager Launch"). In 1998, the Company
acquired two Alternative Managers, and has entered into definitive agreements to
acquire one additional Alternative Manager. In February 1998, the Company
acquired a preferred interest in Bricoleur Capital Management LLC (the
"Bricoleur Acquisition"). In March 1998, the Company entered into definitive
agreements to acquire preferred interests in each of JMG Capital Management LLC
and Pacific Assets Management LLC (collectively, the "JMG-Pacific Acquisition")
and Metropolitan Capital Managers LLC, Metropolitan Capital Managers II LLC and
Metropolitan Capital Advisors LLC (collectively, the "MET Acquisition"). The
Company closed the JMG-Pacific Acquisition in April 1998 and currently
anticipates that the MET Acquisition will close within 30 days after the
Offering. Such acquisitions have been, or will be, accounted for under the
equity method. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent and Pending Acquisitions."
THE AFFILIATED FIRMS
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ASSETS UNDER
MANAGEMENT AS OF
DATE FORMED(2)/ EQUITY OWNERSHIP MARCH 31, 1998
AFFILIATED FIRM INVESTMENT STYLE(1) DATE ACQUIRED PERCENTAGE (IN MILLIONS)
- --------------- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Milestone Global Advisors L.P....... Hedged May 1993/ 99% $ 139
("Milestone") New York, NY Mortgage-Backed July 1996
Securities Trading
Trust Advisors LLC ("Trust
Advisors")........................ Market Neutral July 1989/ 50% 242
Westport, CT Long/Short Equity; October 1996
Stable Value
Silverado Capital Management LLC.... Convertible and March 1997/ 50% 20
("Silverado") Saddle Brook, NJ Merger Arbitrage March 1997
Bricoleur Capital Management LLC.... Long/Short October 1993/ 50% 304
("Bricoleur") San Diego, CA Equity February 1998
JMG Capital Management LLC.......... Diversified March 1992(3)/ 50% 282
and Pacific Assets Management Market Neutral April 1998
LLC (collectively, "JMG-Pacific") Arbitrage
Los Angeles and San Francisco, CA
Metropolitan Capital Managers
LLC,.............................. Event Driven, July 1992/ 50% 306
Metropolitan Capital Managers II
LLC Opportunistic Pending
and Metropolitan Capital Advisors
LLC (collectively, "MET") New
York, NY ------
TOTAL.................................................................................... $1,293
======
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(1) The general terms "arbitrage," "hedging" and "market neutral," as used
herein, have the following meanings: (i) arbitrage means purchasing
securities while selling short other related securities to attempt to
exploit a perceived pricing inefficiency; (ii) hedging means establishing
investment positions the performance of which will tend to offset that of
other investment positions in an effort to reduce the effect of broad market
movements or other factors affecting securities prices; and (iii) market
neutral means a strategy which focuses on obtaining returns with low or no
correlation to the market.
(2) Date Affiliated Firm or predecessor firm formed.
(3) JMG Capital Management LLC's predecessor firm was formed in March 1992 and
Pacific Assets Management LLC's predecessor firm was formed in April 1996.
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THE OFFERING
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Common Stock offered hereby(1)..................... 7,700,000 shares
Common Stock to be outstanding after the
Offering(1)(2)................................... 24,341,808 shares
Use of proceeds.................................... To repay indebtedness outstanding under the
Credit Agreement (as defined herein)
(approximately $30.0 million), to finance the
cash portion of the MET Acquisition
(approximately $18.4 million), to repay the Citco
Loan (as defined herein) ($5.0 million) and the
balance (approximately $31.0 million) for working
capital needs and other general corporate
purposes, including future acquisitions. See "Use
of Proceeds."
Nasdaq National Market symbol...................... AACO
</TABLE>
- ---------------
(1) Assumes that the Underwriters' option to purchase up to an additional
1,155,000 shares to cover over-allotments is not exercised.
(2) The 24,341,808 shares of Common Stock to be outstanding after the Offering
excludes 784,594 shares of Common Stock reserved for issuance upon the
exercise of outstanding options pursuant to the Asset Alliance 1996 Stock
Option Plan, as amended (the "1996 Plan"), and all of the non-plan stock
option agreements. See "Management -- Compensation, Benefit and Retirement
Plans." Such outstanding shares include (i) an aggregate of 6,444,308 shares
of Common Stock issuable upon the conversion of (A) $39.6 million aggregate
principal amount of the Company's outstanding subordinated convertible
debentures and (B) approximately $17.85 million aggregate principal amount
of subordinated convertible debentures to be issued in the MET Acquisition
and (ii) an aggregate of 957,500 shares of Common Stock issuable upon the
exercise of 957,500 warrants (including 175,000 warrants issuable upon the
conversion of the Series A Preferred Stock upon consummation of the
Offering).
SUMMARY RISK FACTORS
Before making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the risk factors set forth in "Risk Factors." These
risks include, among others:
- The Company's continued growth is dependent on the successful
implementation of a strategy which primarily focuses on the acquisition
of preferred interests in Alternative Managers. There can be no assurance
that the Company will be able to locate or acquire suitable Alternative
Managers in the future. The inability on an ongoing basis to acquire
additional Alternative Managers on acceptable terms would limit the
Company's growth and could adversely affect the Company and the market
price of the Common Stock.
- The Company's revenues consist almost entirely of the Preferred Revenue
Shares received from the Affiliated Firms. Because a high percentage of
the Affiliated Firms' revenues are dependent on the realization of
incentive performance fees, unfavorable performance on balance by the
Affiliated Firms would adversely affect the Preferred Revenue Shares and,
therefore, the Company's revenues. The impact of unfavorable performance
on the Company's revenues may be magnified by the existence of minimum
performance benchmarks and loss recovery provisions that would reduce or
postpone an Affiliated Firm's ability to collect performance fees.
Although investment performance of the Affiliated Firms and the
investment funds managed by them generally has been favorable in the
past, there can be no assurance that such performance will be favorable
in the future.
- The Company's growth also depends on increasing the assets managed by the
Affiliated Firms. There can be no assurance that the Company or the
Affiliated Firms will succeed in attracting new assets or retaining those
assets presently under management. Unfavorable investment performance by
the Affiliated Firms would likely impair the growth or retention of
assets under management. Unfavorable investment performance by the
Affiliated Firms or relative underperformance of the Company's
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Common Stock also could result in Alternative Managers becoming less
receptive to an investment by the Company.
- The performance of the Company and the Affiliated Firms may be adversely
affected by changes in economic and market conditions, including
fluctuations in securities prices. The use of leverage (which magnifies
losses to the extent the leverage costs more than the return on the
assets supported by the leverage) and other investment techniques by the
Affiliated Firms may increase the volatility of the Affiliated Firms'
performance and the possibility of poor performance. There can be no
assurance that economic and market conditions will be stable or that
future performance by the Company and the Affiliated Firms will be
favorable.
- The Company and the Affiliated Firms rely on key management personnel,
including the Principals, whose continued service cannot be assured. The
loss of senior management at the Company or the Affiliated Firms could
adversely affect the Company's business.
- The Principals generally manage the day-to-day business of the Affiliated
Firms autonomously, and the Company's management philosophy and financial
arrangements with the Principals limit its ability to influence the
management practices and policies of an Affiliated Firm even if the
Affiliated Firm is experiencing operational difficulties.
- The business of the Affiliated Firms is highly regulated, and the failure
of an Affiliated Firm to comply with such regulations could result in
fines, other sanctions and losses in assets under management and
revenues. In addition, unforeseen regulatory changes affecting
Alternative Managers could adversely affect the Company's business.
- The business of the Affiliated Firms is highly competitive and the
business of the Company is becoming competitive. Many potential
competitors of the Company have greater resources than the Company, which
may affect the Company's ability to compete for, or increase the cost of,
future acquisitions of Alternative Managers. Many competitors and
potential competitors of the Affiliated Firms have greater resources than
the Affiliated Firms, which may affect the ability of the Affiliated
Firms to compete for client assets. Each of the foregoing could adversely
affect the Company's business.
- The Company may be exposed to liabilities incurred by the Affiliated
Firms and there can be no assurance that existing insurance coverage will
be sufficient to offset such liabilities.
- The Affiliated Firms' revenues from incentive compensation may vary
substantially from one period to another and result in more volatile
revenues to the Company than is characteristic of other asset management
firms and holding companies. Therefore, the Company's quarterly results
of operations may fluctuate significantly from quarter to quarter, which
may adversely affect the market price of the Common Stock.
- Future debt and equity financings could adversely affect the Company and
its stockholders.
- The Company could be adversely affected by write-offs of its current and
future investments in the Affiliated Firms.
- The Company could be adversely affected by limitations on the payment by
Affiliated Firms of the Preferred Revenue Shares.
- The ability to effect a change of control of the Company, even if such a
change would be beneficial to the stockholders, could be limited by
certain provisions of the Company's charter and by-laws and Delaware law,
which could adversely affect 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 to influence the outcome
of corporate transactions requiring stockholder approval.
- Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the pro forma net tangible book value per share
of Common Stock purchased in the Offering.
8
<PAGE> 10
- The Company does not plan to declare or pay dividends, and the terms of
its existing credit agreement (the "Credit Agreement") with Bank of
America National Trust and Savings Association (the "Lending Bank") and
the terms of its new credit facility (the "New Credit Facility") with the
Lending Bank could limit the Company's ability to pay dividends and other
distributions to its stockholders.
- The lack of a prior public market, variations in equity market
conditions, and the sale of shares eligible for future sale could
adversely affect the market price of the Common Stock.
BENEFITS TO RELATED PARTIES
AJG Financial Services, Inc. ("AJG"), which will be the beneficial owner of
approximately 19.4% of the outstanding Common Stock after giving effect to the
Offering (including the number of shares of Common Stock having a total purchase
price of $3 million, which the Company expects to be purchased by AJG in the
Offering), will realize material benefits from the Offering because the
guarantee of $20.0 million of the Company's indebtedness under the Credit
Agreement by AJG Co., the parent company of AJG, will terminate upon repayment
of such amount to the Lending Bank under the Credit Agreement. The Citco Group
Limited (the "Citco Group"), which will be the beneficial owner of 2.6% of the
outstanding Common Stock after giving effect to the Offering, also will realize
material benefits from the Offering because the Company intends to use a portion
of the net proceeds of the Offering to repay $5.0 million of indebtedness which
was borrowed by the Company from Citco Banking Corporation N.V., an affiliate of
the Citco Group, to finance a part of the cash portion of the purchase price for
the JMG-Pacific Acquisition (the "Citco Loan"). See "Certain Relationships and
Related Party Transactions."
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<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain historical and pro forma financial
data for the Company. The historical financial data as of December 31, 1996 and
1997, and for the period from February 1, 1996 (date of inception) to December
31, 1996 and the year ended December 31, 1997, have been derived from the
audited consolidated financial statements of the Company included elsewhere
herein, which statements have been audited by Ernst & Young LLP, independent
auditors, as indicated in their report included elsewhere herein. The historical
financial data as of March 31, 1998 and for the three months ended March 31,
1997 and 1998 are derived from the unaudited consolidated financial statements
of the Company included elsewhere herein and include all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position as of, and the results for, such
interim periods. The results of operations for the three months ended March 31,
1998 are not necessarily indicative of the results for any future interim period
or for the year ending December 31, 1998. 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," with the Company's historical consolidated financial statements and
the notes thereto and the historical financial statements and related notes
thereto of each of Bricoleur, JMG-Pacific and MET, with the Company's Unaudited
Pro Forma Financial Consolidated Information and the notes thereto, and with the
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------- THREE MONTHS
PERIOD FROM YEAR ENDED ENDED
FEBRUARY 1, DECEMBER 31, 1997 MARCH 31, 1998
1996 THREE MONTHS ---------------------- ----------------------
(DATE OF ENDED
INCEPTION) YEAR ENDED MARCH 31, PRO FORMA PRO FORMA
TO DECEMBER 31, DECEMBER 31, ------------------ PRO AS PRO AS
1996 1997 1997 1998 FORMA(1) ADJUSTED(2) FORMA(1) ADJUSTED(2)
--------------- ------------ ------- -------- -------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Management and incentive
fees (including equity
interests from
preferred revenue
share)................. $ 914 $7,923 $ 1,086 $ 2,843 $ 25,555 $ 25,555 $ 7,427 $ 7,427
Amortization expense
associated with portion
of equity interest..... (22) (201) (38) (315) (9,902) (9,902) (2,480) (2,480)
Other.................... 86 339 55 56 339 339 56 56
------ ------ ------- -------- -------- -------- -------- --------
Net revenues.............. 978 8,061 1,103 2,584 15,992 15,992 5,003 5,003
------ ------ ------- -------- -------- -------- -------- --------
Expenses:
Sub-advisory fee......... 529 4,864 654 951 4,864 4,864 951 951
Compensation and related
expenses............... 297 1,412 195 645 2,715 2,715 702 702
Other operating
expenses............... 228 900 128 205 1,090 1,090 251 251
------ ------ ------- -------- -------- -------- -------- --------
Total expenses........... 1,054 7,176 977 1,801 8,669 8,669 1,904 1,904
------ ------ ------- -------- -------- -------- -------- --------
Operating (loss) income... (76) 885 126 783 7,323 7,323 3,099 3,099
Interest income(expense),
net...................... 55 36 18 (23) (6,619) (2,788) (1,591) (633)
------ ------ ------- -------- -------- -------- -------- --------
Income (loss) before
income taxes............. (21) 921 144 760 704 4,535 1,508 2,466
Provision for income
taxes.................... 38 357 55 350 911 2,443 756 1,139
------ ------ ------- -------- -------- -------- -------- --------
Net (loss) income......... (59) 564 89 410 (207) 2,092 752 1,327
Preferred stock dividend
requirement.............. 60 125 31 156 625 -- 156 --
------ ------ ------- -------- -------- -------- -------- --------
Net (loss) income
available to common
stockholders............. $ (119) $ 439 $ 58 $ 254 $ (832) $ 2,092 $ 596 $ 1,327
====== ====== ======= ======== ======== ======== ======== ========
Net (loss) income per
share available to common
stockholders:
Basic.................... $(0.03) $ 0.10 $ 0.01 $ 0.05 $ (0.11) $ 0.12 $ 0.08 $ 0.08
====== ====== ======= ======== ======== ======== ======== ========
Diluted.................. $(0.03) $ 0.09 $ 0.01 $ 0.04 $ (0.11) $ 0.12 $ 0.07 $ 0.07
====== ====== ======= ======== ======== ======== ======== ========
Shares used to compute net
(loss) income per share:
Basic.................... 3,837 4,471 4,467 5,477 7,351 16,926 7,365 16,940
====== ====== ======= ======== ======== ======== ======== ========
Diluted.................. 3,837 4,631 4,467 6,824 7,351 17,110 15,049 23,749
====== ====== ======= ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Assets under management
(at period end, in
millions)................ $ 293 $ 391 $ 330 $ 705 $ 1,177 $ 1,177 $ 1,293 $ 1,293
EBITDA(3)................. 51 1,285 216 1,241 17,452 17,452 5,727 5,727
EBITDA as adjusted(4)..... -- 852 148 745 10,894 13,193 3,528 4,103
Net cash (used in)
provided by operating
activities(5)............ (2,734) (1,732) (358) (237) 8,310 10,609 2,546 3,121
Net cash used in investing
activities(5)............ (877) (1,124) (717) (15,938) (65,636) (65,636) (64,400) (64,400)
Net cash provided by (used
in) financing
activities(5)............ 6,834 11,802 (31) 10,460 64,647 96,347 53,805 85,036
(see footnotes on
following page)
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- PRO FORMA AS ADJUSTED
DECEMBER 31, ---------- ------------
----------------- MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998 1998(6) 1998(7)
------ ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $6,518 $20,629 $ 13,477 $ 8,510 $ 39,585
Investments in preferred equity interests................... 1,921 3,956 47,690 137,630 137,630
Total assets................................................ 8,696 24,822 61,691 146,759 177,739
Current liabilities......................................... 720 4,227 2,313 2,313 2,225
Long-term debt.............................................. 750 2,690 19,631 104,616 51,259
Total liabilities........................................... 1,493 7,021 22,036 107,021 53,576
Total stockholders' equity.................................. 7,203 17,801 39,655 39,738 124,163
</TABLE>
- ---------------
(1) Gives effect to (i) the Bricoleur Acquisition, the JMG-Pacific Acquisition
and the MET Acquisition as if such acquisitions had occurred as of the
beginning of the respective periods, (ii) amortization and depreciation of
contracts and other acquired assets, (iii) increased interest costs from
borrowings to finance the Bricoleur Acquisition, the JMG-Pacific Acquisition
and the MET Acquisition, (iv) certain other increased costs to the Company
related to new employment arrangements and increased rent expense and (v)
the related tax effects of the above adjustments. 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) Adjusted to reflect the reduction of interest expense related to (i) the
Credit Agreement and the Citco Loan, which are to be repaid with the net
proceeds from the Offering and (ii) the assumed financing (the "Pro Forma
MET Indebtedness") of $18.4 million representing the cash portion of the
purchase price for the MET Acquisition and related transaction expenses. See
the Unaudited Pro Forma Consolidated Financial Information and the notes
thereto included elsewhere in this Prospectus.
(3) 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 additional acquisitions 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.
(4) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization, extraordinary items and
amortization of original issue discount on the Company's subordinated
convertible debentures. The Company believes that this measure may be useful
to investors as another indicator of funds available to the Company, which
may be used, among other things, to make additional acquisitions and repay
debt obligations. 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.
(5) See Notes (W), (X) and (Y) to Unaudited Pro Forma Consolidated Financial
Information.
(6) Gives effect to the JMG-Pacific Acquisition and the MET Acquisition as if
they had occurred as of March 31, 1998 and the related financing of such
acquisitions, including (i) $20.0 million of additional indebtedness under
the Credit Agreement, (ii) $5.0 million of indebtedness under the Citco Loan
and (iii) the Pro Forma MET Indebtedness. 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.
(7) Adjusted to reflect (i) the sale of 7,700,000 shares of Common Stock in the
Offering (at an assumed initial public offering price of $12.00 per share)
and the receipt of the estimated net proceeds therefrom, (ii) the
application of such estimated net proceeds to repay indebtedness outstanding
under the Credit Agreement ($30.0 million), the Citco Loan ($5.0 million)
and the Pro Forma MET Indebtedness ($18.4 million) and (iii) the conversion
of the Series A Preferred Stock and the Series B Preferred Stock into an
aggregate of 1,875,000 shares of Common Stock and a warrant to purchase
175,000 shares of Common Stock. See the Unaudited Pro Forma Consolidated
Financial Information and the notes thereto included elsewhere in this
Prospectus.
11
<PAGE> 13
RISK FACTORS
An investment in the Common Stock involves various risks. In addition to
the other information in this Prospectus, the following risk factors should be
carefully considered in evaluating the Company and its business before
purchasing the shares of Common Stock offered hereby.
THE COMPANY'S GROWTH STRATEGY MAY NOT BE SUCCESSFUL
The Company's continued growth is dependent on the successful
implementation of a strategy which primarily focuses on the acquisition of
preferred interests in Alternative Managers. Upon consummation of the Offering
and completion of the MET Acquisition, Asset Alliance will have acquired
preferred interests in six Affiliated Firms and intends to continue this
acquisition program in the future, subject to its ability on an ongoing basis to
locate suitable Alternative Managers in which to invest and its ability to
negotiate agreements with such Alternative Managers on acceptable terms. There
can be no assurance that Asset Alliance will be successful in locating or
acquiring such Alternative Managers. The inability to acquire preferred
interests in additional Alternative Managers on acceptable terms would limit the
Company's growth and could adversely affect the Company and the market price for
the Common Stock. See "Business -- Acquisition Criteria" and "-- Growth
Strategy."
UNFAVORABLE PERFORMANCE BY THE AFFILIATED FIRMS WOULD ADVERSELY AFFECT THE
COMPANY
A substantial portion of the revenue of Alternative Managers is based upon
performance-driven incentive compensation whereby the Alternative Manager
receives a percentage of any return to investors, usually on a cumulative basis,
and only after any prior loss has been recouped and sometimes only if the
incremental return exceeds a specified minimum level. If the Alternative
Manager's investment performance does not exceed the applicable performance
requirements during a particular period, no incentive performance fee is earned
for that period.
Most of the investment funds managed by the Affiliated Firms are subject to
loss earnback requirements and a limited number of such investment funds are
subject to a minimum performance level. If a particular fund managed by an
Affiliated Firm has a loss earnback requirement and the fund loses 5% in a
particular year, the Affiliated Firm will not earn any performance fee for that
year and the fund must earn more than 5% subsequent to that year before the
Affiliated Firm will be entitled to any additional performance fee. Accordingly,
revenues from incentive compensation can vary substantially from year to year
depending upon investment performance. Because the Company's revenues consist
almost entirely of the Preferred Revenue Shares received from the Affiliated
Firms, a failure by the Affiliated Firms to earn performance fees would
adversely affect the Preferred Revenue Shares and, accordingly, could reduce the
Company's profitability. Volatility in the quarterly or annual performance of
the Affiliated Firms would result in similar fluctuations in the Company's
quarterly or annual revenues and income. Significant fluctuations in the
Company's revenues and income could adversely affect the price of the Common
Stock. Although management intends to diversify the Company's investments in
Affiliated Firms across a broad range of investment strategies which are not
highly correlated so as to increase the likelihood of achieving more consistent
revenues, there can be no assurance that the acquisition strategy or such
diversification will successfully insulate the Company from volatility in its
revenue stream. An Affiliated Firm's historical returns also may not be
indicative of future performance. See "Business -- Industry Focus." Although
investment performance of the funds managed by the Affiliated Firms generally
has been favorable in the past, there can be no assurance that such performance
will be favorable in the future.
GROWTH OF ASSETS UNDER MANAGEMENT MAY NOT OCCUR
The Company's growth also depends on increasing the assets managed by the
Affiliated Firms and the revenues they derive from managing assets. Growth in
assets under management is principally achieved through attracting new
investors, additional investments by existing investors and achieving increases
in portfolio value as a result of positive investment return. There can be no
assurance that Asset Alliance or the Affiliated Firms will succeed in attracting
new assets, retaining those assets presently under management or
12
<PAGE> 14
achieving portfolio growth through investment performance. Unfavorable
investment performance could impair the Affiliated Firms' and the Company's
ability to attract new assets and retain present investors. Unfavorable
investment performance by the Affiliated Firms or relative underperformance of
the Company's Common Stock could also cause Alternative Managers to become less
receptive to an investment by the Company. Furthermore, the investment
strategies utilized by the Affiliated Firms may be less successful at higher
asset levels, leading the Affiliated Firms to limit their growth or to
experience lower revenue growth than asset growth. See "-- The Performance of
the Company and the Affiliated Firms May Be Adversely Affected by Economic and
Market Conditions" and "-- The Business of the Affiliated Firms is Highly
Competitive and the Business of the Company is Becoming Competitive."
THE PERFORMANCE OF THE COMPANY AND THE AFFILIATED FIRMS MAY BE ADVERSELY
AFFECTED BY ECONOMIC AND MARKET CONDITIONS
The Affiliated Firms offer a range of investment management services and
styles primarily to private investment funds, institutional investors and high
net worth investors. Through the Affiliated Firms, the Company operates in
several sectors within the alternative investment segment of the investment
management industry. By acquiring Affiliated Firms that use investment styles or
asset classes that exhibit low correlation to those investment styles and asset
classes of other Affiliated Firms, the Company seeks to reduce its dependence on
favorable financial markets. However, inasmuch as all of the Affiliated Firms
acquired to date invest solely in the financial markets, the Company believes
that its revenues inevitably will be directly affected to a significant extent
by conditions in the financial markets.
The financial markets and the investment management industry in general
have experienced record performance and record growth in recent years. For
example, between December 31, 1990 and December 31, 1997, the Standard & Poor's
500 Index (the "S&P 500") appreciated at a compound annual rate in excess of 16%
and the Lehman Long Bond Index appreciated at a compound annual rate in excess
of 11%. According to Hedge Fund Research, LLC ("HFR"), a leading data source for
the alternative investment management industry, aggregate assets under
management of Alternative Managers grew at a compound annual rate in excess of
38% during the same period. The financial markets and businesses operating in
the securities industry, however, can be 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 decline in performance by the Affiliated Firms
and may adversely affect assets under management and/or fees at the Affiliated
Firm level, which would reduce the Company's income from its Preferred Revenue
Shares and, therefore, the Company's revenues.
Alternative Managers also typically use leverage as part of their
investment strategy. Leverage involves borrowing or acquiring specially designed
instruments that increase an investor's exposure to changes in the value of the
underlying investment. Any particular Alternative Manager may also use other
investment techniques, some of which are used to hedge -- that is, reduce the
risks of underlying investments. Hedges may not, however, perform in the manner
anticipated. Accordingly, the use of leverage and other investment techniques
may magnify the effect of any underperformance or overperformance.
THE COMPANY AND THE AFFILIATED FIRMS RELY ON KEY MANAGEMENT PERSONNEL WHOSE
CONTINUED SERVICE CANNOT BE ASSURED
The Company's success depends to a significant degree upon its growth
strategy, which, in turn, depends on the continuing contributions of its key
management personnel. In particular, the Company would be materially and
adversely affected if it were to lose the services of Bruce H. Lipnick, its
President, Chief Executive Officer and Chairman of the Board of Directors, and
Arnold L. Mintz, its Executive Vice President, Chief Operating Officer and a
member of the Board of Directors, who each 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 Affiliated Firms. Messrs.
Lipnick and Mintz are subject to five-year employment and non-competition
agreements with the Company.
13
<PAGE> 15
The Affiliated Firms are dependent upon their individual Principals.
Individual Principals of the Affiliated Firms often have regular direct contact
with particular clients and investors, which can lead to a strong client
relationship based on a client's trust in a certain Principal. The loss of a
Principal of an Affiliated Firm could jeopardize the Affiliated Firm's
relationships with, and lead to the loss of, client accounts at such Affiliated
Firm or investors in pooled products managed by the Affiliated Firm. Such losses
could have an adverse effect on the results of operations and financial
condition of the Affiliated Firm and the Company. The Principals are subject to
long-term employment and non-compete agreements with the related Affiliated
Firms of which the Company is a third-party beneficiary.
Although the Company and the Affiliated Firms use a combination of equity
ownership, economic incentives, employment agreements and non-competition
agreements as a means of seeking to retain key management personnel at the
Company and the Affiliated Firms, there can be no assurance that such personnel
will remain with their respective entities. In addition, the enforcement of
employment agreements and non-competition agreements may be subject, in certain
circumstances, to an arbitrator's interpretation of the reasonableness of the
terms of such agreements. While the Company believes the terms of the applicable
agreements would be found to be enforceable by an arbitrator, there can be no
assurance in this regard. 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 the Affiliated Firms would adversely
affect the Company's business.
AFFILIATED FIRM AUTONOMY COULD ADVERSELY AFFECT THE COMPANY
Asset Alliance generally has limited ability to influence the Principals'
day-to-day decisions, policies and strategies in respect of the Affiliated
Firms, including in those cases where an Affiliated Firm may be experiencing
operational difficulties. While Asset Alliance retains the authority to prevent
and cause certain types of activities by the Affiliated Firms, has veto rights
regarding significant business decisions and, with respect to several of the
Affiliated Firms, has the right to appoint up to all of the members of the
management board, although the exercise of such right could, except in limited
circumstances, result in substantial payments to the affected Principals, the
Principals are authorized to manage and conduct the day-to-day operations of the
Affiliated Firms. An Affiliated Firm's non-compliance with regulatory
requirements or the occurrence of other events that Asset Alliance might detect
if it operated the business of the Affiliated Firms itself may not be detected
by Asset Alliance as quickly, if at all, which may subsequently adversely affect
the Company's financial condition and results of operations. See "-- The
Business of the Affiliated Firms is Highly Regulated" and
"Business -- Innovative Structure -- Operational Autonomy of Affiliated Firms."
THE BUSINESS OF THE AFFILIATED FIRMS IS HIGHLY REGULATED
The business of the Affiliated Firms is highly regulated. An Affiliated
Firm's failure to comply with applicable laws or regulations could result in
fines, suspensions of individual employees or other sanctions, including
revocation of an Affiliated Firm's registration as an investment adviser or
broker-dealer (where applicable). Such actions could materially and adversely
affect the Company. Applicable federal laws include the Investment Advisers Act
of 1940, as amended (the "Advisers Act"), the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Asset Alliance 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. See "Business -- Regulation."
In addition, the regulatory environment with respect to Alternative
Managers is continually changing. Regulatory changes, including changes in the
tax laws, the Advisers Act and the Investment Company Act of 1940, as amended
(the "Investment Company Act"), could have the effect of limiting the ability of
the Company and the Affiliated Firms to attract new assets or retain assets
under management. Accordingly, such changes could materially and adversely
affect the Company.
14
<PAGE> 16
THE BUSINESS OF THE AFFILIATED FIRMS IS HIGHLY COMPETITIVE AND THE BUSINESS OF
THE COMPANY IS BECOMING COMPETITIVE
The Company believes the market for acquisitions of Alternative Managers to
be a developing market which presently involves few competitors, none of which
appears to be a significant competitor. The Company is aware of other holding
companies which have been organized to invest in or acquire Alternative Managers
but these firms have engaged in limited activities to date. Nonetheless, the
Company views these firms as among its potential competitors. In addition,
numerous other companies, both privately and publicly held, including commercial
and investment banks, insurance companies, and investment management firms, many
of which have longer established operating histories and significantly greater
resources than the Company, make investments in and acquire investment
management firms. 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 difficult or
impracticable for the Company to make investments in Alternative Managers. See
"Business -- Industry Focus" and "-- Competition."
The investment management business also is highly competitive. Each of the
Affiliated Firms competes with a broad range of investment managers for client
assets, including public and private investment advisers as well as affiliates
of securities broker-dealers, banks, insurance companies and other Alternative
Managers. The Company believes there are approximately 3,000 domestic
Alternative Managers. Many of the Affiliated Firms' competitors and potential
competitors have greater resources and assets under management than any of the
Affiliated Firms or the Affiliated Firms and the Company combined. In addition,
there are relatively few barriers to entry into the alternative investment
management business by new Alternative Managers. The Company believes that each
Affiliated Firm's ability to compete effectively with Alternative Managers and
other investment management firms is primarily dependent upon the Affiliated
Firm's investment strategies, level of investment performance, the reputation of
its Principals and client service. Of lesser importance are fee levels,
marketing and distribution. There can be no assurance that the Affiliated Firms
will be able to achieve favorable investment performance or retain their
existing clients. See "Business -- Competition."
THE COMPANY MAY BE EXPOSED TO LIABILITIES INCURRED BY THE AFFILIATED FIRMS
The Company generally has the contractual right to exercise control over an
Affiliated Firm under specified circumstances, including the breach of an
agreement by, or severe regulatory problems involving, one of its Principals. In
addition, with respect to certain existing Affiliated Firms organized as limited
liability companies, the Company acts as a managing member. Consequently, the
Company potentially could be held liable, as a control person, for certain acts
of the Affiliated Firms, the Principals or their employees. The Company and each
of the Affiliated Firms maintain general liability insurance in amounts which
the Company and the Principals 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 Affiliated Firms or the Company in excess of available insurance coverage
could have a material adverse effect on the Company.
THE COMPANY'S QUARTERLY RESULTS MAY FLUCTUATE SIGNIFICANTLY
The Affiliated Firms generally accrue annual incentive compensation on a
quarterly basis based on performance through the end of the then current quarter
and the Company, through the Preferred Revenue Shares, records its share of such
accruals. Where the performance measurement period for incentive compensation is
longer than one quarter, realization of the accrued quarterly amounts by an
Affiliated Firm is subject to such Affiliated Firm maintaining positive
investment performance through the end of the applicable period, which is
usually annual. If an Affiliated Firm fails to maintain positive investment
performance or its performance falls below any applicable hurdle rate,
subsequent incentive fee accruals will be negative and will reduce or reverse
prior positive incentive fee accruals. Therefore, the Affiliated Firms' revenues
from incentive compensation may vary substantially from one period to another
and this variation may result in more volatile revenues to the Company than is
characteristic of other asset management holding companies. The Company's
quarterly results of operations may fluctuate significantly from quarter to
quarter as a result of the
15
<PAGE> 17
foregoing and other factors, including fluctuations in the various markets in
which the Affiliated Firms invest and general economic conditions. Therefore,
results for any quarter are not necessarily indicative of the results that the
Company may achieve for any subsequent quarter or for a full year. Fluctuations
in the Company's quarterly results of operations may adversely affect the market
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Accounting
Considerations."
FUTURE FINANCINGS COULD ADVERSELY AFFECT THE COMPANY AND ITS STOCKHOLDERS
The Company's acquisitions of preferred interests in Alternative Managers
require substantial capital investments. Although the Company believes that the
proceeds of the Offering together with 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 enable the Company to pursue its anticipated
acquisition activities on a long-term basis. Therefore, the Company will likely
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 additional acquisitions.
This could result in dilution of the equity of existing stockholders, increased
interest expense or decreased net income. In addition, significant capital
requirements associated with its 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. The Company has, however, received a commitment letter for the New
Credit Facility of up to $100 million, subject to the consummation of the
Offering and customary and usual conditions precedent. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY AFFECT THE COMPANY
Upon completion of the Offering and assuming the application of a portion
of the net proceeds of the Offering to repay all indebtedness to be outstanding
under the Credit Agreement, the Company will not have any borrowing capacity
available under the Credit Agreement. The Company has, however, received a
commitment letter from the Lending Bank to provide the New Credit Facility,
subject to the consummation of the Offering and customary and usual conditions
precedent, in an amount of $50 million, which commitment may be increased at the
option of the Company by up to an additional $50 million provided that no
default under such New Credit Facility has occurred. Borrowings under the New
Credit Facility will be available in connection with future acquisitions of
preferred interests in Alternative Managers and for general corporate purposes.
As a result, the Company is and will continue to be subject to risks normally
associated with debt financing. Accordingly, the Company is and will continue to
be subject to the risk that a substantial portion of the Company's cash flow may
be required to be dedicated to the payment of the Company's debt service
obligations or even that its cash flow will be insufficient to meet required
payments of principal and interest. The failure to make any required debt
service payments or to comply with any restrictive or financial covenants
contained in the Credit Agreement or expected to be contained in the New Credit
Facility or any other 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 Agreement are collateralized by
the pledge of all of the Company's interests in each of the Affiliated Firms.
The Company has utilized borrowings under the Credit Agreement to finance the
cash portion of the purchase price for the Bricoleur Acquisition and a part of
the cash portion of the purchase price for the JMG-Pacific Acquisition.
Investments in Bricoleur and JMG-Pacific in the aggregate represent in excess of
68% of the Company's assets at March 31, 1998 on a pro forma basis. The
Company's future borrowings under the New Credit Facility may be used to acquire
preferred interests in Alternative Managers and for general corporate purposes.
The Company's borrowings under the New Credit Facility will be collateralized by
pledges of all of the tangible and intangible assets of the Company and its
material subsidiaries (including all interests in the Affiliated Firms which are
directly held
16
<PAGE> 18
by the Company, as well as all of the interests in the Affiliated Firms which
are indirectly held by the Company through its wholly-owned subsidiaries). The
Credit Agreement contains, and the New Credit Facility is expected to contain,
restrictive covenants that could limit the Company's ability to obtain
additional debt financing and thereby could adversely affect the Company's
ability to make future acquisitions of Alternative Managers. The Credit
Agreement also restricts, and the New Credit Facility is expected to restrict,
the Company and its subsidiaries from, among other things, incurring material
indebtedness, incurring liens, disposing of assets and engaging in extraordinary
transactions. The Company also is required to comply with certain financial
covenants under the Credit Agreement on an ongoing basis, with which the Company
is currently in compliance. Compliance with such financial covenants could have
the effect of constructively limiting the Company's ability to pay dividends and
other distributions to stockholders (although the Company does not anticipate
paying any dividends on its Common Stock in the foreseeable future). The New
Credit Facility is expected to contain similar financial covenants with which
the Company must comply and which could limit the Company's ability to pay
dividends and other distributions to stockholders. In addition, indebtedness
under the Credit Agreement bears interest at variable rates and indebtedness
under the New Credit Facility also will 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. The Company also incurred the
Citco Loan to finance part of the cash portion of the purchase price for the
JMG-Pacific Acquisition. The Citco Loan is expected to be repaid from the net
proceeds of the Offering. See "Use of Proceeds."
THE COMPANY COULD BE ADVERSELY AFFECTED BY WRITE-OFFS OF INVESTMENTS IN
AFFILIATED FIRMS
On a pro forma basis at March 31, 1998, the Company's total assets were
approximately $146.8 million, of which approximately $137.6 million were
investments in Affiliated Firms including amounts allocated to contracts or
other intangibles, which represent the excess of the purchase price of the
Company's investments over the Company's underlying equity in such investments.
There can be no assurance that the value of such intangible assets will ever be
realized by the Company. The portions of the Company's investments allocated to
these contracts and other intangible assets are being amortized on a
straight-line basis over periods ranging from seven to twenty years. Pro forma
amortization of such portion of all investments in Affiliated Firms to date in
accordance with the chosen amortization schedules would have resulted in a
charge to operations of approximately $9.9 million for the year ended December
31, 1997 and $2.5 million for the three months ended March 31, 1998. 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 investments continue to be realizable and if the amortization
period continues to be appropriate. Although at March 31, 1998 the net
unamortized balance of the portion of investments allocated to contracts and
other intangible assets is not considered to be impaired, any future
determination requiring the accelerated write-off of a significant portion of
the Company's investments due to impairment would adversely affect the Company's
results of operations and financial position. In addition, the Company intends
to acquire preferred interests in additional Alternative Managers in the future.
While these firms are expected to contribute additional revenue to the Company,
such investments also will result in the recognition of additional amortizable
assets which will cause further increases in amortization expense.
THE COMPANY COULD BE ADVERSELY AFFECTED BY LIMITATIONS ON PAYMENT OF
DISTRIBUTIONS BY AFFILIATED FIRMS
Asset Alliance's agreements with the Affiliated Firms contain provisions
pursuant to which each Affiliated Firm has agreed to pay a Preferred Revenue
Share to Asset Alliance. There can be no assurance, however, that distributions
of the Preferred Revenue Shares will always be made by the Affiliated Firms or
as to the amounts or timing of any such distributions. See
"Business -- Innovative Structure -- Revenue Sharing Arrangements." The
Organizational Documents (as hereinafter defined) of each Affiliated Firm
generally require the Affiliated Firm to cover expenses of the business and
compensation of the Principals from amounts remaining after distribution of the
Preferred Revenue Share to the Company. However, the payment of the Preferred
Revenue Share to Asset Alliance could become subject to limitations under
applicable bankruptcy
17
<PAGE> 19
and insolvency laws and regulatory requirements applicable to the Affiliated
Firm and claims of creditors of the Affiliated Firm. See
"Business -- Regulation."
THE COMPANY COULD BE ADVERSELY AFFECTED BY LIENS ON INTERESTS IN AFFILIATED
FIRMS
Because Asset Alliance is structured as a holding company, substantially
all of the cash flow of the Company consists of distributions of the Preferred
Revenue Shares received from the Affiliated Firms. Borrowings under the Credit
Agreement are secured by all of Asset Alliance's interests, including the
Preferred Revenue Shares, in the Affiliated Firms. While the Company intends to
use the proceeds of the Offering to repay all indebtedness under the Credit
Agreement, the New Credit Facility is expected to have substantially similar
terms to those contained in the Credit Agreement. In the event of a default
under the Credit Agreement or the New Credit Facility, the Lending Bank may act
on its security interest to take control of all or a portion of the Preferred
Revenue Shares from the Affiliated Firms. Any disruption in the Company's
receipt of the Preferred Revenue Shares from the Affiliated Firms could
adversely affect the Company's operations. See "-- Use of Debt to Finance
Acquisitions Could Adversely Affect the Company" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
FAILURE TO ACHIEVE YEAR 2000 COMPATIBILITY COULD CAUSE SIGNIFICANT LOSSES
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
change. Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and therefore
cannot recognize the year 2000. These date code fields will need to accept four
digit entries in order to distinguish 21(st) century dates from 20(th) century
dates. As a result, computer systems or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. The Company
currently is evaluating its information technology infrastructure and that of
the Affiliated Firms and is working with software vendors to prepare the Company
and the Affiliated Firms for "Year 2000" compliance. The Company does not expect
that the cost to modify information technology infrastructure to be Year 2000
compliant will be material to the financial condition or results of operations
of the Company or the Affiliated Firms, nor does it anticipate any material
disruption in the operations of the Company or the Affiliated Firms as a result
of any failure of the Company or the Affiliated Firms to be Year 2000 compliant.
Nonetheless, there can be no assurance in this regard until such systems are
operational in the year 2000.
The Company's Year 2000 issues relate not only to its own systems and those
of the Affiliated Firms but also to the systems of service providers to the
Company and the Affiliated Firms. The failure to recognize the year 2000 could
have a negative impact on, among other things, the handling of securities
trading, the pricing of securities and account services. While in certain
instances service providers to the Company and the Affiliated Firms have advised
the Company or the Affiliated Firms that they believe Year 2000 compliance has
been achieved, in other instances such service providers believe they have not
yet achieved such compliance. To the extent the Company's, the Affiliated Firms'
or such third parties' systems are not fully Year 2000 compliant, there can be
no assurance that potential systems interruptions or the cost necessary to
update software will not have a material adverse effect on the Company's
business, financial condition, results of operations, or business prospects.
ANTI-TAKEOVER PROVISIONS MAY LIMIT THE ABILITY TO EFFECT A CHANGE IN CONTROL OF
THE COMPANY
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.
See "Description of Capital Stock -- Anti-Takeover Effects of Certain Provisions
of the Certificate and By-Laws and of Delaware Law."
18
<PAGE> 20
CERTAIN STOCKHOLDERS 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
Offering, AJG, the Citco Group, members of senior management of the Company and
the Principals will beneficially own in the aggregate approximately 19.4%, 2.6%,
16.0% and 21.3%, respectively, of the outstanding Common Stock. Upon
consummation of the Offering, there will be no agreements among such persons
relating to the voting of the Common Stock or otherwise relating to corporate
governance issues. If such persons were to vote their shares together, these
persons would have the power to elect the Board of Directors of the Company and
to approve any action requiring majority stockholder approval, including the
adoption of certain amendments to the Company's Certificate and the approval of
sales of all or substantially all of the Company's assets. This control could
preclude any unsolicited acquisition of the Company and, consequently, adversely
affect the market price of the Common Stock. See "Certain Relationships and
Related Party Transactions," "Principal Stockholders" and "Shares Eligible for
Future Sale."
PURCHASERS OF COMMON STOCK IN THE OFFERING 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
March 31, 1998, was ($10.35). Purchasers of the shares of Common Stock sold in
the Offering will experience immediate and substantial pro forma net tangible
book value dilution of $12.65 per share (assuming an initial public offering
price of $12.00 per share). See "Dilution."
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; Volatility
Before the Offering, there has been no public market for the Common Stock.
No assurance can be given 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 will be determined by negotiations between the Company
and the representatives of the Underwriters and may not be indicative of the
market price of the Common Stock after the Offering. See "Underwriting." From
time to time after the Offering, 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. See
"Business -- Industry Focus" and "-- Acquisition Criteria."
Shares Eligible for Future Sale
Sales of a substantial number of shares of Common Stock in the public
market or the perception that such sales could occur could adversely affect
prevailing market prices for the Common Stock. Upon consummation of the
Offering, the Company will have 16,940,000 shares of Common Stock (18,095,000
shares if the Underwriters' over-allotment option is exercised in full)
outstanding. Of these shares, the 7,700,000 shares of Common Stock to be sold in
the Offering (8,855,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for the
425,000 shares of Common Stock (assuming an initial public offering price of
$12.00 per share) expected to be purchased by certain existing stockholders and
certain of their affiliates and any such shares held by "affiliates" of the
Company. In addition, as of the date of this Prospectus, the Company had
outstanding (i) options to purchase 784,594 shares of Common Stock, of which
options to purchase 326,926 shares are currently exercisable, (ii) warrants to
purchase 957,500 shares of Common Stock, all of which are currently exercisable,
and (iii) $39.6 million aggregate principal amount of
19
<PAGE> 21
subordinated convertible debentures which are convertible into 4,659,308 shares
of Common Stock. In connection with the MET Acquisition, the Company expects to
issue $17.85 million aggregate principal amount of subordinated convertible
debentures which are initially convertible into 1,785,000 shares of Common
Stock. In connection with the Offering, the Company and each of the Company's
officers, directors and stockholders have agreed not to dispose of, subject to
certain exceptions, any shares of Common Stock for a period of 270 days from the
date of this Prospectus (the "Lockup Period") without the prior written consent
of Bear, Stearns & Co. Inc., on behalf of the Underwriters. Upon expiration of
the Lockup Period, the Company believes 7,242,368 shares (including 1,875,000
shares issuable upon the conversion of the Series A Preferred Stock and Series B
Preferred Stock and 457,368 shares issuable upon the conversion of subordinated
convertible debentures) will be eligible for sale in the public market subject
to compliance with the volume limitations and other restrictions of Rule 144
under the Securities Act ("Rule 144"). In connection with the Company's
acquisitions, certain Principals holding an aggregate of approximately 2,805,000
shares of Common Stock and approximately $53.55 million aggregate principal
amount of subordinated convertible debentures which are convertible into
5,976,940 shares of Common Stock (including $17.85 million aggregate principal
amount of subordinated convertible debentures convertible into 1,785,000 shares
of Common Stock which the Company expects to issue in connection with the MET
Acquisition) (the "Principal Shares") have entered into agreements with the
Company which prohibit them, subject to certain exceptions, from disposing of
some or all of the Principal Shares for periods of up to five years from the
date such Principal Shares were issued to them by the Company (collectively, the
"Company Lockup Periods"). The Company Lockup Periods will expire at various
times after February 2000. Upon expiration of the Company Lockup Periods, the
applicable Principal Shares will become eligible for sale in the public market
under Rule 144. If stockholders should sell or otherwise dispose of a
substantial amount of shares of Common Stock in the public market, the
prevailing market price could be adversely affected. See "Shares Eligible For
Future Sale."
Registration Rights
The holders of 5,870,500 shares of Common Stock (which includes shares
issuable upon the conversion of the Series A Preferred Stock and Series B
Preferred Stock and shares issuable upon the exercise of currently exercisable
warrants) 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 an additional 10,160,513 shares of Common Stock (which includes
shares issuable upon the exercise of currently exercisable warrants and options
and upon the conversion of subordinated convertible debentures) have the right
to include all or a portion of their shares in certain circumstances in a
subsequent registration statement filed by the Company. These registration
rights may enable such holders to publicly sell shares of Common Stock which
would otherwise be ineligible for sale in the public market. After the Offering,
the Company also intends to register all of the shares of Common Stock issuable
under the 1996 Plan. See "Management -- Compensation, Benefit and Retirement
Plans." The sale of a substantial number of shares of Common Stock into the
public market following the Offering, 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
"Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
20
<PAGE> 22
USE OF PROCEEDS
The total proceeds of the Offering are expected to be approximately $92.4
million ($106.3 million if the Underwriters' overallotment option is exercised
in full), assuming an initial public offering price of $12.00 per share. Of the
net proceeds to the Company of approximately $84.4 million ($97.3 million if the
Underwriters' overallotment option is exercised in full), the Company intends to
use approximately $30 million to repay all indebtedness outstanding under the
Credit Agreement. Borrowings under the Credit Agreement mature in February 2003,
are secured by all of the Company's interests in the Affiliated Firms and bear
interest at a variable rate (6.5% per annum at March 31, 1998). Borrowings under
the Credit Agreement were used to pay the cash portion of the purchase price for
the Bricoleur Acquisition and a part of the cash portion of the purchase price
for the JMG-Pacific Acquisition. In addition, the Company intends to use
approximately $5 million of the net proceeds of the Offering to repay the Citco
Loan, which was incurred to finance a part of the cash portion of the purchase
price for the JMG-Pacific Acquisition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company also intends to use approximately $18.4 million of the net
proceeds of the Offering to finance the cash portion of the purchase price for
the MET Acquisition, as well as related transaction expenses. The closing of the
MET Acquisition is subject to customary closing conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent and Pending Acquisitions."
The balance of the net proceeds of the Offering will be used for working
capital and general corporate purposes, including future acquisitions of
preferred interests in Alternative Managers. In addition, the Company has
received a commitment letter from the Lending Bank for the New Credit Facility
of up to $100 million, subject to the consummation of the Offering and customary
and usual conditions precedent. Borrowings under the New Credit Facility will be
available for use towards the financing of future acquisitions of Alternative
Managers and for general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Although the Company regularly reviews acquisition prospects
that would augment or complement the Company's existing holdings, the Company
does not presently have any agreement with respect to any additional
acquisitions.
Pending the use of the net proceeds as described above, the net proceeds
will be invested in short-term, investment grade securities.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on the Common Stock.
The Company does not anticipate declaring or paying cash dividends in the
foreseeable future and currently intends to retain any future earnings for
reinvestment in its business. In addition, certain restrictions in the Credit
Agreement may act to limit the Company's ability to pay dividends. Under the
Credit Agreement, the Company is required to comply with certain financial
covenants on an ongoing basis, with which the Company is currently in
compliance. Compliance with such covenants could have the effect of
constructively limiting the Company's ability to pay dividends and other
distributions to stockholders. The New Credit Facility will contain similar
financial covenants which could limit the Company's ability to pay dividends and
other distributions to stockholders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Any future determination to declare or pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, restrictions contained in
the Credit Agreement and the New Credit Facility, capital requirements and such
other factors as the Board of Directors deems relevant.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth: (i) the actual capitalization of the
Company at March 31, 1998; (ii) the pro forma capitalization as of such date
after giving effect to the JMG-Pacific Acquisition and the MET Acquisition and
the borrowing of an additional $25.0 million under the Credit Agreement and the
Citco Loan; and (iii) such pro forma capitalization as adjusted to give effect
to the sale of the shares of Common Stock in the Offering (at an assumed initial
public offering price of $12.00 per share) and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt........................................... $19,631 $104,616(1) $ 51,259
Minority interest........................................ 9 9 9
Stockholders' equity(2)(3):
Series A Preferred Stock, $.01 par value; 100,000
shares authorized, 100,000 shares issued and
outstanding (aggregate liquidation value of
$2,500,000), actual and pro forma; none issued and
outstanding, pro forma as adjusted.................. 1 1 --
Series B Preferred Stock, $.01 par value; 100,000
shares authorized, 100,000 shares issued and
outstanding (aggregate liquidation value of
$10,000,000), actual and pro forma; none issued and
outstanding, pro forma as adjusted.................. 1 1 --
Common Stock, $.01 par value, 100,000,000 shares
authorized, 7,365,000 issued and outstanding, actual
and pro forma; 16,940,000 issued and outstanding,
pro forma as adjusted............................... 74 74 170
Additional paid-in capital............................. 39,058 39,141 123,699
Retained earnings...................................... 521 521 294
------- -------- --------
Total stockholders' equity............................... 39,655 39,738 124,163
------- -------- --------
Total capitalization..................................... $59,295 $144,363 $175,431
======= ======== ========
</TABLE>
- ---------------
(1) Includes the Pro Forma MET Indebtedness.
(2) Excludes (i) 628,000 shares of Common Stock reserved for issuance under
options outstanding under the 1996 Plan, of which 223,332 shares are
currently issuable upon the exercise of outstanding stock options with
exercise prices ranging from $2.86 to $10.00, (ii) 156,594 shares of Common
Stock reserved for issuance under options outstanding which were granted
other than under the 1996 Plan, of which 103,594 shares are currently
issuable upon the exercise of outstanding stock options with exercise prices
ranging from $5.00 to $10.00, (iii) 6,434,308 shares of Common Stock
reserved for issuance upon conversion of an aggregate of $57.3 million
principal amount of subordinated convertible debentures (including
subordinated convertible debentures to be issued in connection with the MET
Acquisition) with conversion prices ranging from $7.50 to $15.00 and (iv)
957,500 shares of Common Stock reserved for issuance upon the exercise of
warrants (including 175,000 warrants issuable upon the conversion of the
Series A Preferred Stock upon consummation of the Offering) with exercise
prices ranging from $5.00 to $12.50. See "Management -- Compensation,
Benefit and Retirement Plans" and "Description of Capital
Stock -- Authorized and Outstanding Capital Stock."
(3) Upon the consummation of the Offering and the conversion of the Series A
Preferred Stock and the Series B Preferred Stock, the Company will be
authorized to issue 20,000,000 shares of undesignated Preferred Stock, $.01
par value per share, none of which will be issued and outstanding. See
"Description of Capital Stock -- Preferred Stock."
22
<PAGE> 24
DILUTION
The unaudited pro forma net tangible book value (deficit) of the Company at
March 31, 1998 after giving effect to the JMG-Pacific Acquisition and the MET
Acquisition was ($95.7) million, or ($10.35) per share. After giving effect to
the sale of the 7,700,000 shares of Common Stock in the Offering at an assumed
initial public offering price of $12.00 per share (before deducting the
underwriting discounts and commissions and estimated offering expenses), and
applying the estimated net proceeds therefrom as set forth in "Use of Proceeds,"
the pro forma net tangible book value of the Company at March 31, 1998 would
have been ($11.0) million, or ($0.65) per share. This represents an immediate
increase in net tangible book value of $9.70 per share to the Company's existing
stockholders and an immediate dilution in net tangible book value of $12.65 per
share to purchasers of Common Stock in the Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Pro forma net tangible book value (deficit) per share
before the Offering.................................. $(10.35)
Increase in pro forma net tangible book value (deficit)
per share attributable to the Offering............... 9.70
-------
Pro forma net tangible book value (deficit) per share after
the Offering.............................................. (0.65)
-------
Dilution in pro forma net tangible book value (deficit) per
share to new investors.................................... $ 12.65
=======
</TABLE>
Assuming the Underwriters' over-allotment option is exercised in full, the
pro forma net tangible book value at March 31, 1998 would be $1.9 million or
$0.10 per share, the immediate increase in pro forma net tangible book value of
shares owned by existing stockholders would be $10.45 per share, and the
immediate dilution to purchasers of shares of Common Stock in the Offering would
be $11.90 per share.
The following table summarizes, at March 31, 1998, after giving effect to
the sale of the shares of Common Stock in the Offering at an assumed initial
public offering price of $12.00 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 to be paid by purchasers of the
Common Stock in the Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES OWNED CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............. 9,240,000 54.5% $ 39,772,600 30.1% $ 4.30
Investors in Offering................ 7,700,000 45.5 92,400,000 69.9 $12.00
---------- ----- ------------ -----
Total...................... 16,940,000 100.0% $132,172,600 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Excludes (i) 628,000 shares of Common Stock reserved for issuance under
options outstanding under the 1996 Plan, of which 223,332 shares are
currently issuable upon the exercise of outstanding stock options with
exercise prices ranging from $2.86 to $10.00, (ii) 156,594 shares of Common
Stock reserved for issuance under options outstanding which were granted
other than under the 1996 Plan, of which 103,594 shares are currently
issuable upon exercise of outstanding stock options with exercise prices
ranging from $5.00 to $10.00, (iii) 6,434,308 shares of Common Stock
reserved for issuance upon conversion of an aggregate of $57.3 million
principal amount of subordinated convertible debentures (including
subordinated convertible debentures to be issued in connection with the MET
Acquisition) with conversion prices ranging from $7.50 to $15.00 and (iv)
957,500 shares of Common Stock reserved for issuance upon the exercise of
warrants (including 175,000 warrants issuable upon the conversion of the
Series A Preferred Stock upon consummation of the Offering) with exercise
prices ranging from $5.00 to $12.50. See "Management -- Compensation,
Benefit and Retirement Plans" and "Description of Capital
Stock -- Authorized and Outstanding Capital Stock." To the extent
outstanding stock options, warrants or subordinated convertible debentures
are exercised or converted, as the case may be, there will be further
dilution to new investors.
23
<PAGE> 25
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain historical financial data for the
Company. The historical financial data as of December 31, 1996 and 1997, and for
the period from February 1, 1996 (date of inception) to December 31, 1996 and
the year ended December 31, 1997, have been derived from the audited
consolidated financial statements of the Company included elsewhere herein,
which statements have been audited by Ernst & Young LLP, independent auditors,
as indicated in their report included elsewhere herein. The historical financial
data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998
are derived from the unaudited consolidated financial statements of the Company
included elsewhere herein and include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position as of, and the results for, such interim
periods. The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of results for any future interim period or for the
year ending December 31, 1998. This selected historical financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Company's historical
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1996 THREE MONTHS
(DATE OF INCEPTION) YEAR ENDED ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, -----------------
1996 1997 1997 1998
------------------- ------------ ------ --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Management and incentive fees (including equity
interests from preferred revenue share)............. $ 914 $ 7,923 $1,086 $ 2,843
Amortization expense associated with portion of equity
interest............................................ (22) (201) (38) (315)
Other................................................. 86 339 55 56
------ ------- ------ --------
Net revenues............................................ 978 8,061 1,103 2,584
------ ------- ------ --------
Expenses:
Sub-advisory fee...................................... 529 4,864 654 951
Compensation and related expenses..................... 297 1,412 195 645
Other operating expenses.............................. 228 900 128 205
------ ------- ------ --------
Total expenses........................................ 1,054 7,176 977 1,801
------ ------- ------ --------
Operating (loss) income................................. (76) 885 126 783
Interest income, net.................................... 55 36 18 (23)
------ ------- ------ --------
Income (loss) before income taxes....................... (21) 921 144 760
Provision for income taxes.............................. 38 357 55 350
------ ------- ------ --------
Net (loss) income....................................... (59) 564 89 410
Preferred stock dividend requirement.................... 60 125 31 156
------ ------- ------ --------
Net (loss) income available to common stockholders...... $ (119) $ 439 $ 58 $ 254
====== ======= ====== ========
Net (loss) income per share available to common
stockholders:
Basic................................................. $(0.03) $ 0.10 $ 0.01 $ 0.05
====== ======= ====== ========
Diluted............................................... $(0.03) $ 0.09 $ 0.01 $ 0.04
====== ======= ====== ========
Shares used to compute net (loss) income per share:
Basic................................................. 3,837 4,471 4,467 5,477
====== ======= ====== ========
Diluted............................................... 3,837 4,631 4,467 6,824
====== ======= ====== ========
OTHER FINANCIAL DATA:
Assets under management (at period end,
in millions).......................................... $ 293 $ 391 $ 330 $ 705
EBITDA(1)............................................... 51 1,285 216 1,241
EBITDA as adjusted(2)................................... -- 852 148 745
Net cash (used in) provided by operating activities..... (2,734) (1,732) (358) (237)
Net cash used in investing activities................... (877) (1,124) (717) (15,938)
Net cash provided by (used in) financing activities..... 6,834 11,802 (31) 10,460
</TABLE>
(see footnotes on following page)
24
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $6,518 $20,629 $13,477
Investments in preferred equity interests................... 1,921 3,956 47,690
Total assets................................................ 8,696 24,822 61,691
Current liabilities......................................... 720 4,227 2,313
Long-term debt.............................................. 750 2,690 19,631
Total liabilities........................................... 1,493 7,021 22,036
Total stockholders' equity.................................. 7,203 17,801 39,655
</TABLE>
- ---------------
(1) 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 additional acquisitions 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.
(2) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization, extraordinary items and
amortization of original issue discount on the Company's subordinated
convertible debentures. The Company believes that this measure may be useful
to investors as another indicator of funds available to the Company, which
may be used, among other things, to make additional acquisitions and repay
debt obligations. 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.
25
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated balance sheet at March 31, 1998 sets
forth the historical consolidated balance sheet of the Company adjusted for the
JMG-Pacific Acquisition and the MET Acquisition as if they had occurred as of
March 31, 1998 and the related financing of such acquisitions, including (i)
$20.0 million of indebtedness under the Credit Agreement, (ii) $5.0 million of
indebtedness under the Citco Loan and (iii) an assumed financing of $18.4
million (the "Pro Forma MET Indebtedness") representing the cash portion of the
purchase price for the MET Acquisition and related transaction expenses.
The unaudited pro forma, as adjusted, consolidated balance sheet at March
31, 1998 further reflects (i) the sale of 7,700,000 shares of Common Stock in
the Offering (at an assumed initial public offering price of $12.00 per share)
and the receipt of the estimated net proceeds therefrom, (ii) the application of
such estimated net proceeds to repay the indebtedness outstanding under the
Credit Agreement, the Citco Loan and the Pro Forma MET Indebtedness and (iii)
the conversion of the Series A Preferred Stock and the Series B Preferred Stock
into an aggregate of 1,875,000 shares of Common Stock and a warrant to purchase
175,000 shares of Common Stock.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1997 and for the three months ended March 31, 1998 set forth
the historical consolidated results of operations of the Company adjusted for
(i) the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET
Acquisition as if such acquisitions had occurred as of the beginning of the
respective periods, (ii) amortization and depreciation of contracts and other
acquired assets, (iii) increased interest costs from borrowings to finance the
acquisitions, (iv) certain other increased costs related to new employment
arrangements and increased rent expense and (v) the related tax effects of the
above adjustments. The unaudited pro forma consolidated statement of operations
does not reflect earn-out payments or purchase price adjustments with respect to
the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET Acquisition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma as adjusted consolidated statement of operations
further reflects the reduction of interest expense related to (i) the Credit
Agreement and the Citco Loan, which are to be repaid with the net proceeds from
the Offering and (ii) the Pro Forma MET Indebtedness, but does not reflect the
repricing of certain stock options described in Note (I) to the unaudited pro
forma consolidated balance sheet.
The pro forma adjustments are based on available information and upon
certain assumptions that management believes are reasonable under the
circumstances. Each of the Bricoleur Acquisition, the JMG-Pacific Acquisition
and the MET Acquisition is accounted for under the equity method of accounting.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited pro forma consolidated financial information should be read
in conjunction with the Consolidated Financial Statements of the Company and the
financial statements of Bricoleur, JMG-Pacific and MET included herein. The
unaudited pro forma consolidated financial information is based on the
historical data with respect to the Company and the Affiliated Firms, 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.
26
<PAGE> 28
ASSET ALLIANCE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 6,456 $43,357(B) $ 1,489 $84,432(E) $ 32,564
(12)(C) (53,357)(F)
(48,312)(D)
Investment in limited
partnerships............ 4,681 -- 4,681 -- 4,681
Fees and other
receivables............. 2,230 -- 2,230 -- 2,230
Other current assets....... 110 -- 110 -- 110
------- ------- -------- ------- --------
Total current assets......... 13,477 (4,967) 8,510 31,075 39,585
Investments in preferred
equity interests........... 47,690 89,940(D) 137,630 -- 137,630
Property and
equipment -- net........... 362 -- 362 -- 362
Organization costs -- net.... 142 -- 142 -- 142
Other........................ 20 95(C) 115 (95)(G) 20
------- ------- -------- ------- --------
Total assets....... $61,691 $85,068 $146,759 $30,980 $177,739
======= ======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities.......... $ 2,313 $ -- $ 2,313 $ (88)(I) $ 2,225
Deferred income taxes........ 27 -- 27 -- 27
Deferred rent................ 56 -- 56 -- 56
Long-term debt............... 19,631 43,357(B) 104,616 (53,357)(F) 51,259
41,628(D)
Minority interest............ 9 -- 9 -- 9
Stockholders' equity:
Preferred stock, Series A
Convertible
Redeemable.............. 1 -- 1 (1)(H) --
Preferred stock, Series B
Convertible
Redeemable.............. 1 -- 1 (1)(H) --
Common stock............... 74 -- 74 77(E) 170
19(H)
Additional paid-in
capital................. 39,058 83(C) 39,141 84,355(E) 123,699
(17)(H)
220(I)
Retained earnings.......... 521 -- 521 (95)(G) 294
(132)(I)
------- ------- -------- ------- --------
Total stockholders'
equity........... 39,655 83 39,738 84,425 124,163
------- ------- -------- ------- --------
Total liabilities
and stockholders'
equity........... $61,691 $85,068 $146,759 $30,980 $177,739
======= ======= ======== ======= ========
</TABLE>
See accompanying notes (A)-(I) to this
unaudited pro forma consolidated balance sheet.
27
<PAGE> 29
ASSET ALLIANCE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORICAL(J) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Management and incentive fees
and equity interest from
preferred revenue share...... $ 7,923 $17,632 (K) $ 25,555 $ -- $ 25,555
Amortization expense associated
with portion of equity
interest..................... (201) (9,701)(L) (9,902) -- (9,902)
Realized and unrealized
appreciation on investment in
limited partnership............. 339 -- 339 -- 339
---------- ------- -------- ------ --------
Net revenues...................... 8,061 7,931 15,992 -- 15,992
Expenses:
Sub-advisory fee................ 4,864 -- 4,864 -- 4,864
Compensation and related
expenses..................... 1,412 1,303 (M) 2,715 -- 2,715
Other operating expenses........ 900 190 (N) 1,090 -- 1,090
---------- ------- -------- ------ --------
Total expenses.................... 7,176 1,493 8,669 -- 8,669
---------- ------- -------- ------ --------
Operating income.................. 885 6,438 7,323 -- 7,323
Interest income (expense) net..... 36 (6,655)(O) (6,619) 3,831 (T) (2,788)
---------- ------- -------- ------ --------
Income before income taxes........ 921 (217) 704 3,831 4,535
Provision for income taxes........ 357 554 (P) 911 1,532 (P) 2,443
---------- ------- -------- ------ --------
Net income........................ 564 (771) (207) 2,299 2,092
Preferred stock dividend
requirement..................... 125 500 (Q) 625 (625)(U) --
---------- ------- -------- ------ --------
Net income (loss) available to
common stockholders............. $ 439 $(1,271) $ (832) $2,924 $ 2,092
========== ======= ======== ====== ========
Net income (loss) per share
available to common
stockholders(V):
Basic........................... $ 0.10 $ (0.11) $ 0.12
========== ======== ========
Diluted......................... $ 0.09 $ (0.11) $ 0.12
========== ======== ========
Shares used to compute net income
(loss) per share:
Basic........................... 4,471 7,351 16,926
========== ======== ========
Diluted......................... 4,631 7,351 17,110
========== ======== ========
Assets under management (at period
end, in millions)............... $ 391 $ 1,177 $ 1,177
========== ======== ========
EBITDA(R)......................... $ 1,285 $ 17,452 $ 17,452
========== ======== ========
EBITDA as adjusted(S)............. $ 852 $ 10,894 $ 13,193
========== ======== ========
Net cash (used in) provided by
operating activities(W)......... $ (1,732) $ 8,310 $ 10,609
========== ======== ========
Net cash used in investing
activities(X)................... $ (1,124) $(65,636) $(65,636)
========== ======== ========
Net cash provided by financing
activities(Y)................... $ 11,802 $ 64,647 $ 96,347
========== ======== ========
</TABLE>
See accompanying notes (K)-(Y) to this
unaudited pro forma consolidated statement of operations.
28
<PAGE> 30
ASSET ALLIANCE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORICAL(J) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Management and incentive fees and
equity interest from preferred
revenue share..................... $ 2,843 $ 4,584 (K) $ 7,427 $ -- $ 7,427
Amortization expense associated with
portion of equity interest........ (315) (2,165)(L) (2,480) -- (2,480)
Realized and unrealized appreciation on
investment in limited partnership.... 56 -- 56 -- 56
---------- ------- -------- ------ --------
Net revenues........................... 2,584 2,419 5,003 -- 5,003
Expenses:
Sub-advisory fee..................... 951 -- 951 -- 951
Compensation and related expenses.... 645 57 (M) 702 -- 702
Other operating expenses............. 205 46 (N) 251 -- 251
---------- ------- -------- ------ --------
Total expenses......................... 1,801 103 1,904 -- 1,904
---------- ------- -------- ------ --------
Operating income....................... 783 2,316 3,099 -- 3,099
Interest income (expense) net.......... (23) (1,568)(O) (1,591) 958 (T) (633)
---------- ------- -------- ------ --------
Income before income taxes............. 760 748 1,508 958 2,466
Provision for income taxes............. 350 406 (P) 756 383 (P) 1,139
---------- ------- -------- ------ --------
Net income............................. 410 342 752 575 1,327
Preferred stock dividend requirement... 156 -- 156 (156)(U) --
---------- ------- -------- ------ --------
Net income (loss) available to common
stockholders......................... $ 254 $ 342 $ 596 $ 731 $ 1,327
========== ======= ======== ====== ========
Net income (loss) per share available
to common stockholders(V):
Basic................................ $ 0.05 $ 0.08 $ 0.08
========== ======== ========
Diluted.............................. $ 0.04 $ 0.07 $ 0.07
========== ======== ========
Shares used to compute net income
(loss) per share:
Basic................................ 5,477 7,365 16,940
========== ======== ========
Diluted.............................. 6,824 15,049 23,749
========== ======== ========
Assets under management (at period end,
in millions)......................... $ 705 $ 1,293 $ 1,293
========== ======== ========
EBITDA(R).............................. $ 1,241 $ 5,727 $ 5,727
========== ======== ========
EBITDA as adjusted(S).................. $ 745 $ 3,528 $ 4,103
========== ======== ========
Net cash (used in) provided by
operating activities(W).............. $ (237) $ 2,546 $ 3,121
========== ======== ========
Net cash used in investing
activities(X)........................ $ (15,938) $(64,400) $(64,400)
========== ======== ========
Net cash provided by financing
activities(Y)........................ $ 10,460 $ 53,805 $ 85,036
========== ======== ========
</TABLE>
See accompanying notes (K)-(Y) to this
unaudited pro forma consolidated statement of operations.
29
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the historical consolidated balance sheet of the Company at March
31, 1998.
(B) Reflects borrowings necessary to complete the JMG-Pacific Acquisition and
the MET Acquisition as follows:
<TABLE>
<S> <C>
Additional indebtedness under the Credit Agreement.......... $20,000,000
Citco Loan.................................................. 5,000,000
Pro Forma MET Indebtedness.................................. 18,357,000
-----------
$43,357,000
===========
</TABLE>
(C) Represents (i) capitalized financing costs associated with the Credit
Agreement and the Citco Loan of $12,000 and (ii) the value of 10,000
warrants to purchase shares of Common Stock issued in connection with the
Credit Agreement and 17,500 warrants to purchase shares of Common Stock
issued in connection with the Citco Loan, with an estimated value of $3.00
per warrant.
(D) Reflects the purchase price for the JMG-Pacific Acquisition and the MET
Acquisition, inclusive of estimated transaction costs as follows:
<TABLE>
<CAPTION>
SUBORDINATED
CONVERTIBLE
INVESTMENT CASH DEBENTURES
----------- ----------- ------------
<S> <C> <C> <C>
JMG-Pacific Acquisition............................ $56,386,000 $29,955,000 $26,431,000
MET Acquisition.................................... 33,554,000 18,357,000 15,197,000
----------- ----------- -----------
Pro forma adjustment to investments in preferred
equity interests ................................ $89,940,000 $48,312,000 $41,628,000
=========== =========== ===========
</TABLE>
(E) Reflects net proceeds of $84,432,000 from the Offering.
(F) Reflects repayment of indebtedness outstanding under the Credit Agreement,
the Citco Loan and the Pro Forma MET Indebtedness (includes amount in Note
(B) above plus $10,000,000 reflected in the historical consolidated balance
sheet used for Bricoleur Acquisition).
(G) Reflects write-off of financing costs relating to debt repaid.
(H) Reflects the conversion of the Series A Preferred Stock and the Series B
Preferred Stock into 1,875,000 shares of Common Stock and 175,000 warrants
to purchase shares of Common Stock.
(I) Reflects $220,000 representing a non-recurring charge related to the
repricing of 36,594 stock options upon the consummation of the Offering to
one-half of the public offering price per share, less related tax benefit
of $88,000 (see Note 10 to the Company's Consolidated Financial
Statements). Such adjustment is not reflected in the unaudited pro forma
consolidated statements of operations because it represents a non-recurring
charge.
30
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (SEE NOTE (I))
(J) Reflects the historical consolidated statement of operations of the Company
for the year ended December 31, 1997 and for the three months ended March
31, 1998, which includes, in the case of the three months ended March 31,
1998, the results of the Bricoleur Acquisition from the date of
acquisition.
(K) In the case of the year ended December 31, 1997, represents, as detailed in
the following table, the sum of (i) 50% of the management and incentive fees
earned by Bricoleur (including 50% of the $1,601,510 earned by the
Principals of Bricoleur for acting as a sub-advisor to JIB Associates, which
fees will be considered as earned by Bricoleur under the Organizational
Documents for Bricoleur but are not reflected in Bricoleur's historical
financial statements) for the year ended December 31, 1997, (ii) 50% of the
management and incentive fees earned by JMG-Pacific for the year ended
December 31, 1997 and (iii) 40% of the management and incentive fees earned
by MET for the year ended December 31, 1997. In the case of the three months
ended March 31, 1998, represents, as detailed in the following table, the
sum of (i) 50% of the management and incentive fees earned by Bricoleur for
the period from January 1, 1998 through February 28, 1998, the date of the
Bricoleur Acquisition, (ii) 50% of the management and incentive fees earned
by JMG-Pacific for the three months ended March 31, 1998 and (iii) 40% of
the management and incentive fees earned by MET for the three months ended
March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1997 1998
------------ ---------------
<S> <C> <C>
Bricoleur....................................... $ 6,198,000 $1,050,000
JMG-Pacific..................................... 5,969,000 2,095,000
MET............................................. 5,465,000 1,439,000
----------- ----------
$17,632,000 $4,584,000
=========== ==========
</TABLE>
(L) Reflects the increase in amortization of intangible assets in connection
with the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET
Acquisition, which intangible assets are being amortized over periods from
seven to twenty years, as detailed in the following tables:
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE
-------------------------------
AMORTIZATION YEAR ENDED THREE MONTHS
PERIOD DECEMBER 31, ENDED MARCH 31,
IN YEARS 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C> <C>
BRICOLEUR
Contracts 25%..... $ 10,675,000 7 $1,525,000 $ 254,000(*)
Goodwill 75%..... 32,025,000 20 1,601,000 267,000(*)
------------ ---------- ----------
$ 42,700,000 $3,126,000 $ 521,000(*)
============ ========== ==========
JMG-PACIFIC
Contracts 25%..... $ 14,063,000 7 $2,009,000 $ 502,000
Goodwill 75%..... 42,188,000 20 2,109,000 528,000
------------ ---------- ----------
$ 56,251,000 $4,118,000 $1,030,000
============ ========== ==========
MET
Contracts 25%..... $ 8,389,000 7 $1,199,000 $ 300,000
Goodwill 75%..... 25,165,000 20 1,258,000 314,000
------------ ---------- ----------
$ 33,554,000 $2,457,000 $ 614,000
============ ========== ==========
TOTALS
Contracts.................. $ 33,127,000 $4,733,000 $1,056,000
Goodwill................... 99,378,000 4,968,000 1,109,000
------------ ---------- ----------
$132,505,000 $9,701,000 $2,165,000
============ ========== ==========
</TABLE>
(*) Excludes the period following February 28, 1998, the date of the
Bricoleur Acquisition, for which information is recorded in the
Company's historical consolidated statement of operations.
31
<PAGE> 33
(M) Reflects increased compensation to executives of the Company under new
employment arrangements.
(N) Reflects (i) $162,000 and $41,000 in increased rent expense for the year
ended December 31, 1997 and for the three months ended March 31, 1998,
respectively, and (ii) $28,000 and $5,000 in increased depreciation of fixed
assets acquired in the Bricoleur Acquisition for the year ended December 31,
1997 and for the three months ended March 31, 1998, respectively.
(O) Reflects the increase in interest expense in connection with indebtedness
under the Credit Agreement, the Citco Loan, the Company's subordinated
convertible debentures and the Pro Forma MET Indebtedness, as follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
------------------------------
YEAR ENDED THREE MONTHS
BEGINNING PRINCIPAL DECEMBER 31, ENDED MARCH 31,
AMOUNT WEIGHTED AVERAGE RATE 1997 1998
------------------- --------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Credit Agreement............ $ 30,000,000 7.107% $2,132,000 $ 475,167(*)
Citco Loan.................. 5,000,000 8.500% 425,000 106,250
Subordinated convertible
debentures................ 47,477,808 5.946% 2,823,236 668,272(*)
Pro Forma MET Indebtedness.. 18,207,000 7.000% 1,274,490 318,623
------------ ----- ---------- ----------
Total............. $100,684,808 6.609% $6,654,726 $1,568,312
============ ===== ========== ==========
</TABLE>
(*) Excludes the interest expense associated with $10.0 million of
indebtedness under the Credit Agreement and $5,850,000 of subordinated
convertible debentures for the period following February 28, 1998, the
date of the Bricoleur Acquisition, for which information is recorded
in the Company's historical consolidated statement of operations
(P) Reflects the tax effect of the pro forma adjustments described in Notes (I)
through (O) and the offering adjustment described in Note (T). The
amortization adjustment related to Bricoleur Acquisition goodwill (See Note
(L)) is not tax effected.
(Q) Reflects the preferred stock dividend requirement on the Series B Preferred
Stock, as if preferred stock was outstanding as of the beginning of the
year.
(R) 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 additional acquisitions 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.
(S) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization, extraordinary items and
amortization of original issue discount on the Company's subordinated
convertible debentures. The Company believes that this measure may be
useful to investors as another indicator of funds available to the Company,
which may be used, among other things, to make additional acquisitions and
repay debt obligations. 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.
(T) Reflects the elimination of interest expense in connection with the Credit
Agreement, the Citco Loan and the Pro Forma MET Indebtedness, giving effect
to the repayment of such indebtedness with the net proceeds of the
Offering. See Note (O).
(U) Reflects reversal of preferred dividend requirements resulting from
conversions of Series A Preferred Stock and Series B Preferred Stock upon
consummation of the Offering.
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<PAGE> 34
(V) Net income (loss) per share available to common stockholders is computed in
accordance with Financial Accounting Standards Board No. 128, Earnings Per
Share, which is effective as of December 31, 1997.
Pro forma net income (loss) per share has been calculated using the weighted
average shares outstanding calculated as described above after giving effect
to the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET
Acquisition.
Pro forma net income (loss) per share as adjusted is computed using the pro
forma weighted average shares outstanding plus (i) the shares of Common
Stock sold in the Offering and (ii) the shares of Common Stock and the
warrants to purchase shares of Common Stock issuable upon conversion of the
Series A Preferred Stock and the Series B Preferred Stock upon consummation
of the Offering, as if all such shares were issued at the beginning of the
periods presented.
Pro forma net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------------- ------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for pro forma basic net income
(loss) per share --
Pro forma net income available to
common stockholders.................. $ (832) $ 2,092 $ 596 $ 1,327
Effect of dilutive securities:
Subordinated convertible debentures
issued in acquisitions (net
interest)............................ --* --* 418 418
Preferred stock dividend requirement.... --* N/A 31 N/A
------ ------- ------ -------
Numerator for pro forma diluted net
income (loss) per share.............. $ (832) $ 2,092 $1,045 $ 1,745
====== ======= ====== =======
DENOMINATOR:
Historical weighted average shares of
Common Stock for respective
periods.............................. 4,471 4,471 5,477 5,477
Shares issued upon conversion of Series
A Preferred Stock and
Series B Preferred Stock............. --* 1,875 -- 1,875
Shares issued for acquisitions.......... 2,880 2,880 1,888(**) 1,888(**)
Shares issued in Offering............... -- 7,700 -- 7,700
------ ------- ------ -------
Denominator for pro forma basic net
income (loss) per share.............. 7,351 16,926 7,365 16,940
Effect of dilutive securities
Series A Preferred Stock............. --* N/A 875 N/A
Stock options........................ --* 58 100 100
Warrants............................. --* 126 372 372
Subordinated convertible
debentures......................... --* --* 6,337 6,337
------ ------- ------ -------
Denominator for pro forma diluted net
income (loss) per share.............. 7,351 17,110 15,049 23,749
------ ------- ------ -------
</TABLE>
- ---------------
*Anti-dilutive.
**Represents the 2,880,000 shares issued in the Bricoleur Acquisition on
February 28, 1998 less 992,000 shares included in the historical weighted
average shares for the three months ended March 31, 1998.
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<PAGE> 35
(W) Pro forma and pro forma as adjusted net cash (used in) provided by operating
activities represent historical cash flows for the respective periods
adjusted for the pro forma and offering adjustments to the unaudited pro
forma consolidated statement of operations noted above, assuming that all
such adjustments, which ultimately will be settled in cash, were paid or
received during the respective periods. Noncash items related to such
adjustments are excluded from such adjustments and represent amortization
expense associated with portion of equity interest, depreciation of fixed
assets and original issue discount amortization.
(X) Pro forma and pro forma as adjusted net cash used in investing activities
represent historical cash flows for the respective periods adjusted for the
JMG-Pacific Acquisition, the MET Acquisition and the Bricoleur Acquisition.
(Y) Pro forma net cash provided by financing activities represents historical
cash flows for the respective periods adjusted for borrowings necessary to
complete the acquisitions (the $43,357,000 described in Note (B) plus
$10,000,000 necessary for the Bricoleur Acquisition as of December 31,
1997), financing costs (Note (C)), and the preferred dividend requirements,
which are assumed to have been paid (Note (Q)). Pro forma as adjusted net
cash provided by financing activities further reflects the net proceeds from
the Offering (Note (E)), the repayment of the borrowings (Note (F)) and the
reversal of the preferred dividend requirements (Note (U)).
34
<PAGE> 36
BUSINESS
OVERVIEW
Asset Alliance is an investment management holding company that acquires
preferred interests in privately owned investment management firms specializing
in alternative investment strategies ("Alternative Managers"). The Company
considers Alternative Managers to be those who seek higher risk adjusted rates
of return through use of hedging or other risk modifying strategies. The Company
generally purchases a 50% equity interest in a given firm and is granted a
preferred right to a comparable percentage of the firm's gross revenues (the
"Preferred Revenue Share"). Asset Alliance's strategic focus is to acquire
interests in established mid-sized Alternative Managers with assets under
management ranging from $50 million to $500 million. Upon completion of the MET
Acquisition, Asset Alliance will have acquired preferred interests in six
Alternative Managers with aggregate assets under management of approximately
$1.3 billion as of March 31, 1998. The Company's goal is to build a large and
diversified family of Alternative Managers each possessing a high level of
expertise in its chosen investment discipline.
The Company was founded in February 1996 by Bruce H. Lipnick, the Company's
President, Chief Executive Officer and Chairman of the Board of Directors, and
Arnold L. Mintz, the Company's Executive Vice President, Chief Operating Officer
and a member of the Company's Board of Directors, and commenced operations in
July 1996. Messrs. Lipnick and Mintz have been involved in the investment
management and related investment services industry, with a focus on alternative
investment strategies, for most of their professional careers. See
"Management -- Directors and Executive Officers."
The field of alternative investment strategies comprises one of the fastest
growing segments of the domestic investment management industry. Alternative
Managers generally charge higher asset-based fees on their assets under
management than do traditional investment managers and also are entitled to
annual incentive performance fees or profit allocations as well. This higher
level and dual source of revenues is a distinguishing and attractive
characteristic of the alternative investment management business.
Asset Alliance has developed an innovative and flexible acquisition
structure which it believes aligns its strategic and financial goals with those
of the principals (the "Principals") of the Alternative Managers in which it
acquires an interest who generally are the key employees and owners of a
substantial majority of the equity of an Alternative Manager. As used in this
Prospectus, the term "Alternative Managers" refers to investment managers of the
type in which the Company is interested in acquiring interests, and the term
"Affiliated Firms" refers to those Alternative Managers in which the Company has
acquired or contracted to acquire interests. Acquisitions ordinarily are
structured to allocate all net income of an Affiliated Firm, after payment of
the Preferred Revenue Share to Asset Alliance, to the Principals, thereby
permitting them to participate in the future growth of the Affiliated Firm, in
which they retain a significant ownership position, and creating incentives for
them to increase revenues and assets under management. As Affiliated Firms
increase revenues, the Company's income from its Preferred Revenue Shares also
will increase. Principals participate in and are encouraged to further the
growth of the Company through ownership of Common Stock or Common Stock
equivalents received as part of the consideration for the Preferred Revenue
Share. Principals also may be eligible to receive incentive options to purchase
Common Stock if the Affiliated Firm achieves specified revenue goals. Asset
Alliance has actively encouraged and now generally requires the Principals to
provide for orderly succession in the management and ownership of the Affiliated
Firm in order to realize the value of their retained ownership positions. Asset
Alliance itself does not provide Principals with a buy-out of their remaining
ownership interest in the Affiliated Firm.
Day-to-day management of the Affiliated Firms is delegated to the
Principals. Asset Alliance retains rights of consent on major matters. In
addition, Asset Alliance has the right to appoint 50% or more of the members of
the management board of certain of the Affiliated Firms, and has the right to
appoint up to all of such members in the other Affiliated Firms, although the
exercise of the right to appoint up to all such members could, except in certain
limited circumstances, result in substantial payments to the affected
Principals. The Principals of each Affiliated Firm retain full investment
discretion with respect to their firm's assets under management. Asset Alliance
provides expertise with respect to marketing and distribution
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<PAGE> 37
services, strategic planning and administration, as well as back-office support
and systems. The Company also seeks to provide new product development services
for the Affiliated Firms, including the integration of existing investment
products and the distribution of new products that incorporate the investment
strategies of several Affiliated Firms. The Company also actively introduces the
Affiliated Firms to new sources of capital and new markets for their investment
products which can result in access to long-term investment capital. Asset
Alliance's marketing and operational support enables the Principals to focus to
a greater extent on their primary expertise -- portfolio management. See
"-- Growth Strategy -- Product Development and Marketing/Operational Support."
The Affiliated Firms have grown rapidly in terms of revenues and assets
under management since their respective inception dates. On a combined basis for
the Affiliated Firms, total management and incentive performance fees have grown
from $2.9 million for the year ended December 31, 1994 to $46.9 million for the
year ended December 31, 1997, representing a compound annual growth rate of
approximately 153%, while total assets under management have grown from $363
million as of December 31, 1994 to $1.3 billion as of March 31, 1998,
representing a compound annual growth rate of 48%. On a historical basis for the
year ended December 31, 1997 and for the three months ended March 31, 1998, the
Company had gross revenues of $7.9 million and $2.8 million, respectively,
amortization of intangibles of $201,000 and $315,000, respectively, operating
expenses of $7.2 million and $1.8 million, respectively, net income of $564,000
and $410,000, respectively, EBITDA of $1.3 million and $1.2 million,
respectively, and EBITDA as adjusted of $852,000 and $745,000, respectively. On
a pro forma basis for the year ended December 31, 1997 and for the three months
ended March 31, 1998, the Company had gross revenues of $25.6 million and $7.4
million, respectively, amortization of intangibles of $9.9 million and $2.5
million, respectively, operating expenses of $8.7 million and $1.9 million,
respectively, net (loss) income of ($207,000) and $752,000, respectively, EBITDA
of $17.5 million and $5.7 million, respectively, and EBITDA as adjusted of $10.9
million and $3.5 million, respectively.
INDUSTRY FOCUS
Many professional investors historically have allocated a percentage of
their investment portfolio to assets other than traditional stock and bond
holdings and to investment strategies other than traditional long-term
investment. By investing in such "alternative" investment strategies, investors
seek to diversify their holdings across investment styles whose performance is
not highly correlated. Correlation generally indicates the degree to which
investments are expected to experience similar results under similar conditions.
Allocating assets among different asset classes and investment styles with a low
degree of correlation theoretically reduces the overall risk of an investment
portfolio. An increasing awareness of the potential benefits of this type of
portfolio diversification and the desire to obtain risk-adjusted investment
returns in excess of those available in traditional stock and bond holdings has
made the alternative asset management business one of the fastest growing
sectors of the domestic investment management industry.
The Company believes, based upon information provided by HFR, that the
domestic alternative investment management business currently consists of
approximately 3,000 Alternative Managers with aggregate assets under management
in excess of $350 billion. As of December 31, 1990, there were estimated to be
approximately 650 Alternative Managers with total net assets under management of
approximately $39 billion. Thus, over the seven-year period from December 31,
1990 to December 31, 1997, the total net assets under management by Alternative
Managers grew at a compound annual rate in excess of 38%. Moreover, the Company
believes that global assets committed to Alternative Managers also have
increased significantly as foreign investors have become aware of alternative
investment strategies.
Asset Alliance expects that the market for investments in alternative
investment strategies will continue to expand rapidly thereby creating increased
demand for experienced Alternative Managers. The Company believes such demand
will be fueled in part by the increasing wealth of investors. A recent study by
Merrill Lynch International and Gemini Consulting concluded that total global
wealth of high net worth investors (defined as individuals with a net worth of
at least $1 million) was $17.4 trillion as of year end 1997 and is expected to
grow to $23.1 trillion by the year 2000. The alternative asset management
business as a whole remains highly fragmented and generally is characterized by
entrepreneurial organizations which are often
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<PAGE> 38
heavily or entirely dependent on the investment management, operational and
marketing skills of a small group of individuals. Accordingly, Asset Alliance
believes that significant opportunities exist for future growth of the Company
through the acquisition of preferred interests in additional Alternative
Managers.
The distinction between "traditional" and "alternative" investments is
evolving. The Company considers Alternative Managers to be those who seek higher
risk adjusted rates of return through use of hedging or other risk modifying
strategies. The investment specialities of the Affiliated Firms and of
Alternative Managers in which the Company may in the future acquire interests
include convertible arbitrage, event driven arbitrage, fixed income arbitrage,
futures arbitrage, merger arbitrage, risk arbitrage, distressed securities,
hedged mortgage-backed securities trading, hedged high yield mezzanine
financing, market neutral, long-short equity, synthetic guaranteed investment
contracts, managed futures, enhanced overlay management, emerging markets and
hedged international equities and bonds. The Company continually monitors the
investment management market in search of promising alternative investment
strategies in addition to those listed above. The Company does not intend to
purchase interests in traditional asset managers that invest solely on an
unhedged basis in the debt and equity markets unless a portion of their assets
under management can be converted to alternative investment strategies.
The Company believes that equity investments in Alternative Managers offer
a higher, although potentially more volatile, revenue stream than ownership
interests in traditional investment managers. Alternative Managers generally
charge higher asset-based fees on their assets under management than traditional
investment managers and also generally are entitled to periodic incentive
performance fees or profit allocations on incremental positive performance. As a
result, Alternative Managers with positive performance historically have
generated substantially more revenues per dollar of assets under management at
any given performance level than have traditional investment managers. This
higher level and dual source of revenues is a distinguishing and attractive
characteristic of the alternative investment management business. The Asset
Alliance acquisition structure enables the Company to participate in this
favorable revenue stream.
The incentive fees or profit allocations of several of the Affiliated Firms
and many of the Alternative Managers that would be acquisition candidates for
the Company are subject to hurdle and/or "high water mark" limitations. High
water mark provisions require that the client's accounts recoup any loss in net
asset value before the Affiliated Firm or Alternative Manager receives any
additional incentive fee or profit allocation. Hurdle rate provisions require
that the client's account achieve a specified return before the Affiliated Firm
or Alternative Manager receives an incentive fee or profit allocation. Sometimes
hurdle rate and high water mark provisions are combined. A substantial majority
of the Affiliated Firm's assets under management are subject to high water mark
limitations and a limited number of such investment funds are subject to a
hurdle rate. These limitations could reduce the Company's revenues from a
particular Affiliated Firm not only during periods of underperformance but also
during subsequent period of positive performance required to recoup the prior
underperformance. The existence of hurdle and high water mark provisions
together with the inherent variability of incentive fees may result in
volatility in the Company's revenue stream over time. The Company seeks to
ameliorate this characteristic of its revenue stream by acquiring interests in
Affiliated Firms that have achieved consistent performance records and whose
investment styles and asset classes exhibit a low correlation with those of
other Affiliated Firms. See "-- Acquisition Criteria."
INNOVATIVE STRUCTURE
Asset Alliance has developed an innovative and flexible acquisition
structure which it believes aligns its strategic and financial goals with those
of the Principals. The Company structures its acquisitions to address the
critical business, personal, tax and estate planning needs of the Principals.
The purchase price for the acquisition of a preferred interest in an Alternative
Manager is subject to negotiation among the Company and the Principals but is
typically based on a multiple of the firm's normalized historical revenues, and
the multiple is based in large part on the expected growth rate of the firm's
revenues from the normalized level. Consideration paid to the Principals for the
sale of a preferred interest in their firm to Asset Alliance generally consists
of a combination of cash, subordinated notes, Common Stock and options to
purchase Common Stock. Principals are expected to execute long-term employment
agreements that contain covenants not-to-compete and to retain a significant
portion of their liquid net-worth on an ongoing basis in the funds they
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<PAGE> 39
manage. Once the Company has acquired an interest in an Affiliated Firm, that
Affiliated Firm continues to operate as a separate business under its existing
firm name, under the continuing guidance and direction of the Principals and
following its existing investment philosophy and methodology.
Operational Autonomy of Affiliated Firms
As part of the Asset Alliance acquisition structure, each of the Affiliated
Firms is (and the Company believes that each future Affiliated Firm will be)
organized as a separate and largely autonomous limited liability company,
partnership or offshore entity. Each Affiliated Firm operates under its own
limited liability company agreement, partnership agreement or similar charter
documents (such Affiliated Firm's "Organizational Documents"), which include
provisions regarding the use of the Affiliated Firm's revenues and the
management of the Affiliated Firm.
The management provisions in each of the Organizational Documents are
jointly developed by Asset Alliance and the Principals at the time Asset
Alliance acquires a preferred interest in the Affiliated Firm. These provisions
generally delegate to the Principals the power and authority to carry on the
day-to-day operation and management of the Affiliated Firm, including matters
relating to non-equity personnel, investment management policies and fee
structures (consistent with the firm's established investment style and asset
class), client relationships and employee compensation programs. Asset Alliance
retains the authority to prevent certain specified types of actions which Asset
Alliance believes could adversely affect revenue distributions to the Company.
For instance, the Affiliated Firms may not enter into new businesses, incur
material debt, admit new equity owners or reallocate the Principals' equity
interests beyond certain limits or take other extraordinary actions without the
consent of Asset Alliance. In addition, Asset Alliance has the right to appoint
50% or more of the members of the management board of certain of the Affiliated
Firms and has the right to appoint up to all of such members in the other
Affiliated Firms, although the exercise of the right to appoint up to all of
such members could, except in certain limited circumstances, result in
substantial payments to the affected Principals. Asset Alliance itself is solely
a holding company and 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
The Organizational Documents of each Affiliated Firm also contain the
revenue sharing arrangements for that Affiliated Firm. These arrangements
generally provide for a Preferred Revenue Share to Asset Alliance and require
the Affiliated Firm to distribute such amounts to Asset Alliance on a preferred
basis at specified time intervals, typically monthly or quarterly in respect of
management fees, and typically annually in respect of incentive fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Accounting Considerations." All remaining revenues of the
Affiliated Firm are allocated to the Principals of the firm (the "Principals'
Allocation"). The Principals' Allocation generally is required to be used first
to pay all expenses of the Affiliated Firm, including salaries, and to fund
reserves and, thereafter, any excess may be distributed to the Principals. In
certain instances, the Company may agree to bear a pro rata and capped portion
of expenses of an Affiliated Firm or increased expenses associated with
infrastructure improvement and personnel recruitment. Asset Alliance expects
that, after payment of the Preferred Revenue Share, the revenue sharing
arrangements will generally result in the distribution of substantially all of
each Affiliated Firm's remaining net income on an annual basis to the
Principals. Asset Alliance will realize return on its investment in an
Affiliated Firm primarily through the Preferred Revenue Share. The Company does
not anticipate disposing of any of its preferred interests in the Affiliated
Firms in order to realize any appreciation in value as the Affiliated Firms
grow.
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[Description of Flow Diagram:]
[Diagram demonstrating the flow of revenues from an affiliated Firm to the
Company, to Principals of Affiliated Firms, and to pay operating expenses of the
Affiliated Firms.]
[Diagram begins with a rectangle with "Affiliated Firm" written inside; an
arrow moves from top to bottom, beginning on the bottom side of the rectangle,
and connects to rectangle entitled "Equity and Revenue Sharing Agreement".]
[Two arrows originate from the rectangle, one on the left side of the
rectangle and one on the right. The arrow on the left side with the percentage
"50%" written on the arrow, moves left then down to a rectangle with "AAC's"
Preferred Revenue Share" written inside; the arrow on the right side moves right
and then down to a rectangle with "Principals' Allocation" written inside.]
[Two arrows originate from the bottom of the rectangle titled "Principals'
Allocation"; one arrow moves diagonally downwards and to the left and connects
with another rectangle shape entitled "Employee Compensation; Other Operating
Expenses"; the second arrow moves diagonally downwards and to the right to a
rectangle entitled "Principals of Affiliated Firms".]
<PAGE> 41
Succession Management
Asset Alliance has actively encouraged and now generally requires the
Principals to provide for orderly succession in the management and ownership of
the Affiliated Firm in order to realize the value of their retained ownership
positions. Asset Alliance itself does not provide Principals with a buy-out of
their remaining ownership interests in the Affiliated Firm. As part of Asset
Alliance's acquisition structure, the Organizational Documents provide the
framework which allows the Principals to recruit and develop successors who they
believe are capable of acquiring the Principals' interests and generating
additional growth.
In general, the Organizational Documents permit the Principals to transfer
a percentage of their equity in the Affiliated Firm to other full-time employees
of that firm. Employees who receive equity interests (collectively, with the
Principals, the "Management Owners") are required to become parties to the
Organizational Documents. The Organizational Documents generally include
provisions permitting the purchase of equity interests of Management Owners who
are retiring or reducing their involvement in the business by those other
persons who are taking on increased roles.
The buy-sell provisions of the Organizational Documents permit or, in
certain cases, require Management Owners to sell to other Management Owners
various portions of their equity prior to and after becoming less than full-time
employees of the Affiliated Firm. The price to be paid to the Management Owners
for such equity interests varies based on the circumstances at the time and, in
certain cases, may be determined by negotiation among the Management Owners of
the Affiliated Firm. The Company expects that terminating Management Owners will
generally receive a significantly higher price in circumstances where they have
facilitated succession through the prior transfer of a significant percentage of
their equity interests and have provided long term notice of their departures.
Asset Alliance believes that the provisions described above align the interests
of the Principals with those of the Company in addressing the issue of
succession management and the continued viability of the Affiliated Firms. By
creating successor managers positioned to continue the operations of the
Affiliated Firms, the Principals create the mechanism which permits them to
realize the value of their retained ownership interest in the Affiliated Firm
upon termination of their employment. To the extent succession management plans
are successfully implemented, Asset Alliance also benefits through the
continuation of the Preferred Revenue Shares as successive generations of
management assume control of the Affiliated Firms.
The Company believes that its typical acquisition structure appeals to
Alternative Managers for a number of financial and operational reasons.
Successful Alternative Managers can generate substantial present earnings and
future earnings potential for the Principals of such firm. However, such
earnings are subject to variability depending upon the Alternative Manager's
performance and the ability to retain and attract assets, among other factors.
In addition, a large portion of the Principals' personal net worth is often
represented by their ownership interest in the Alternative Manager. Because
Alternative Managers in the Company's target market are usually relatively small
and specialized entities, these ownership interests are generally illiquid and
non-diversified. From the Principals' perspective, a partial sale of their firm
to the Company is an effective means to realize a portion of the past success of
the Alternative Manager while continuing to maintain day-to-day operational
control of the firm with increased marketing and operational support. In the
Asset Alliance acquisition structure, Principals can participate in the future
success of their firm through the Principals' Allocation and share in the growth
of Asset Alliance through their ownership of Common Stock and Common Stock
equivalents received as acquisition consideration.
ACQUISITION CRITERIA
The Company has established certain guidelines for prospective acquisitions
of existing Alternative Managers. Among the criteria that the Company considers
are the background and experience of the Principals of such firms, historical
investment performance, investment style, amount of assets under management,
historical annual growth rates, earnings and cash flows from management fees and
incentive revenues, and the ability and likelihood that the Principals can
expand their asset base and revenues.
The Company targets Alternative Managers with assets under management of
between $50 million and $500 million and places particular emphasis on those
Alternative Managers whose Principals have at least ten
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<PAGE> 42
years of investment management experience, a diversified client base, an
established performance record, a demonstrated ability to hedge market risk, a
desire to promote succession management and significant personal investments in
the investment vehicles they manage.
The Company seeks to acquire Alternative Managers whose investment styles
have low correlations of likely investment results with traditional indices of
investment performance, such as the Lehman Long-Bond Index or the S&P 500. Asset
Alliance also seeks to minimize the correlation of likely investment results
among the Affiliated Firms in which it has an interest by acquiring interests in
Alternative Managers representing a broad spectrum of investment styles.
Correlation is measured over the entire period for which the relevant
Alternative Manager's performance is available using either a quantitative
measure such as correlation coefficients or a less formal comparison of
investment returns for an Alternative Manager versus contemporaneous returns of
an appropriate benchmark or of present Affiliated Firms. Through this approach,
the Company believes different Affiliated Firms are likely to outperform the
market indices in different market cycles, thereby resulting in a more
consistent revenue stream to the Company. Additional quantitative measures,
which support Asset Alliance's qualitative assessment, include risk adjusted
performance (sometimes called "alpha"), standard deviation of return (a measure
of risk), the Sharpe ratio (which compares investment return to the standard
deviation of return) and the frequency and severity of declines in any periods
of negative investment return. The Company believes that currently the universe
of Alternative Managers that meet the Company's initial criteria in terms of
size and investment style exceeds 1,500. Although many of these Alternative
Managers currently have insufficient performance records or infrastructure, the
Company believes, through its review of industry data from sources such as
Managed Accounts Reports Inc., Van Hedge Fund Advisors, Inc., HFR and TASS
Management Ltd., that there are presently several hundred firms that would be
potentially attractive candidates for the Company's acquisition program. There
can be no assurance that any of such firms would be receptive to an acquisition
by the Company or that the Company will be successful in acquiring any of the
Alternative Managers which the Company determines to be attractive acquisition
candidates.
GROWTH STRATEGY
Active Acquisition Program
The core growth strategy of the Company is to acquire preferred interests
in high quality Alternative Managers. Upon completion of the MET Acquisition,
Asset Alliance will have acquired preferred interests in six Affiliated Firms
with aggregate assets under management of approximately $1.3 billion as of March
31, 1998. Through careful industry research and an active calling program, Asset
Alliance believes it has generated a strong list of potential acquisition
candidates. Each acquisition to date has increased the Company's cash earnings
per share upon closing. The Company believes that the Offering will increase the
Company's ability to acquire Alternative Managers by providing additional
capital for such acquisitions and by establishing a trading market for the
Common Stock, which will enhance the attractiveness of the Common Stock and
Common Stock equivalents as part of the consideration for such acquisitions.
In general, the Company seeks to initiate its contacts with potential
acquisition candidates on an exclusive basis and does not seek to participate in
competitive auction processes. If necessary, the Company may utilize investment
bankers or other intermediaries on a selective basis to assist it in identifying
potential acquisition candidates.
Asset Alliance identifies and develops relationships with potential
acquisition candidates based on a thorough understanding of its principal target
universe -- mid-sized Alternative Managers with assets under management of
between $50 million and $500 million. Using data from third party vendors,
public and industry sources, and its own research, Asset Alliance screens and
prioritizes prospects and systematically reviews previous contacts with
potential acquisition candidates. The Company believes that this approach
enhances its ability to identify, develop and maintain relationships with
potential acquisition candidates and their principals. Such activities lead to a
substantial number of unsolicited calls to Asset Alliance from Alternative
Managers. The Company believes that it has established ongoing relationships
with a substantial number of Alternative Managers which may consider receiving
an investment by Asset Alliance in the future.
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<PAGE> 43
Once discussions with an acquisition candidate lead to transaction
negotiations, Asset Alliance's management performs substantially all of the
functions related to the valuation, structuring and negotiation of the
transaction. The Company's management team includes professionals with
experience in the field of mergers and acquisitions of investment management
firms. The Company conducts extensive due diligence regarding the acquisition
candidate and uses specialized accounting and legal services to assist it in
this process. The due diligence process includes extensive in person interviews
of key investment professionals and a thorough analysis of performance records,
financial statements, business procedures, operating practices, including risk
monitoring systems, and tax reports. With the consent of the key investment
professionals, Asset Alliance conducts both exploratory discussions with
personal, professional and investor references and detailed background
investigations. Legal due diligence includes an extensive review of business,
operational and compliance matters.
When Asset Alliance considers acquiring an interest in an Alternative
Manager, it evaluates whether the firm's historical revenues and expenses will
support payment of (i) the Preferred Revenue Share, (ii) the projected operating
expenses of the potential Affiliated Firm over time and (iii) reasonable bonus
compensation to the Principals through their retained interests. 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 future liabilities or changes in the revenue and expense base of any
Affiliated Firm and, therefore, no assurance that the agreed upon allocation of
revenues will be sufficient to ensure payment of the Preferred Revenue Share.
See "Risk Factors -- The Company Could Be Adversely Affected by Limitations on
Payment of Distributions by Affiliated Firms."
Experienced Manager Launches
In addition to acquisitions of existing Alternative Managers, Asset
Alliance also will launch new Alternative Managers in partnership with
experienced investment managers that have demonstrated superior risk-adjusted
investment performance and who desire to work in an independent and
entrepreneurial environment (an "Experienced Manager Launch" or an "EML"). In
EML transactions, the Company provides a portion of the seed capital and other
assistance necessary for an individual or individuals to establish a new
alternative management entity. Using relatively small capital outlays, the
Company seeks to achieve substantially higher rates of growth in assets under
management and revenues through Experienced Manager Launches. Because of the
elevated level of risk associated with an EML, the Company intends to limit such
transactions to experienced investment managers that have demonstrable long-term
track records of generally at least eight years and who, in the Company's
judgment, have the ability and desire to manage, and increase the size and
profitability of, an Alternative Manager in their field of investment expertise.
The Company generally retains a greater degree of control over the operation and
direction of an EML than in acquisitions of established Alternative Managers.
The Company perceives Experienced Manager Launches to be a useful long-term tool
that will enable Asset Alliance to create new entities positioned to participate
in the growing demand for Alternative Managers. The Company believes the
experience of its senior management in establishing and operating Alternative
Managers will be of significant value to Affiliated Firms organized in the
Company's EML program.
The Company anticipates that each Experienced Manager Launch will
necessarily involve different terms and features. In general, an EML transaction
will involve the Company and the Principals contributing capital to the new firm
in an amount necessary to fund operating expenses for an agreed upon period
until the entity is economically self-supporting. There can be no assurance that
EML entities will successfully achieve such status. Asset Alliance will
generally provide the new Principals with ownership of a portion of the new
firm's equity, as well as incentives, which may be linked to the Company's
Common Stock, for achieving certain minimum revenue levels within a given period
of time. In an EML transaction, Asset Alliance will generally require Principals
to commit a significant amount of their personal capital to the assets under
management of the new Affiliated Firm. To date, Asset Alliance has completed one
Experienced Manager Launch. See "-- The Affiliated Firms -- Silverado Capital
Management LLC."
42
<PAGE> 44
Product Development and Marketing/Operational Support
The Company intends to continue to develop new products and enhance
existing products for its Affiliated Firms as another component of the growth
strategy. In October 1997, the Company organized Asset Alliance Preferred
Manager Trust LLC ("Preferred Manager Trust"), a private investment fund which
has a minimum two year investment period for investors and which has raised
assets of over $30 million since inception. Preferred Manager Trust is managed
by Asset Alliance Advisors Inc., a wholly-owned subsidiary of the Company.
Preferred Manager Trust allocates investors' assets under management among
underlying investment vehicles established by the Affiliated Firms. Preferred
Manager Trust represents a new distribution channel for the Company, as well as
for the Affiliated Firms and is an integral part of the Company's effort to
promote the investment vehicles of and access new investors for existing and
future Affiliated Firms, including Experienced Manager Launches.
Other product development initiatives include "conversion enhancements"
whereby the Company creates or assists in the creation of alternative investment
products for a traditional manager it has acquired. See "-- The Affiliated
Firms -- Trust Advisors LLC."
In addition to its product development and enhancement efforts, Asset
Alliance offers to support the operations of the Affiliated Firms. Asset
Alliance assists the Affiliated Firms, as appropriate, with the marketing and
distribution of their existing products. Asset Alliance has a full-time
marketing officer servicing the Affiliated Firms and intends to increase its
marketing and client service staff substantially over time. Asset Alliance
believes that the Principals of each Affiliated Firm are in the best position to
assess their firm's needs and opportunities, and that the autonomy and culture
of each Affiliated Firm should be preserved. However, as requested by the
Principals, Asset Alliance provides strategic, marketing and operational
assistance to the Affiliated Firms. The Company believes that these support
services are attractive to the Principals because such services lessen the
operational burden placed on the Principals, allow the Principals to focus on
their primary expertise of portfolio management and may not otherwise be as
accessible or as affordable for firms of their size.
POTENTIAL GROWTH THROUGH INVESTMENT PERFORMANCE
The Company's growth also is directly related to the investment performance
of the Affiliated Firms. Positive investment performance net of expenses
increases portfolio value and assets under management by an Affiliated Firm. As
both the management fee and the incentive fee charged by the Affiliated Firms
are based in part on assets under management, increases in assets will increase
the revenues of such firm (assuming no withdrawals and, in the case of the
incentive fee, consistent positive performance). Asset Alliance participates
directly in any increase in the revenues of an Affiliated Firm through the
Preferred Revenue Share. To the extent positive investment performance can be
maintained by an Affiliated Firm, a compounding effect will occur in such firm's
assets and revenues. The magnitude of the compounding effect will grow with
increased levels of investment performance. Internal growth through positive
investment performance effectively results in the acquisition of new assets
under management without the costs associated with attracting new investors or
establishing new investment vehicles.
While Asset Alliance is not itself involved in any way in the day to day
investment decisions of the Affiliated Firms, it does perform a detailed due
diligence on each potential Affiliated Firm's investment performance track
record and, most importantly, on the variability of each potential Affiliated
Firm's returns. Asset Alliance actively seeks Affiliated Firms with Principals
that have records of consistent returns across market cycles and that the
Company believes are capable of achieving internal growth in assets through
positive investment performance, as well as external growth through marketing
efforts. There can be no assurance that the future investment performance of any
Affiliated Firm will be positive. Negative investment performance by an
Affiliated Firm (assuming no contributions by investors) will result in loss of
assets and revenues by such firm. A decrease in the revenues of an Affiliated
Firm will decrease the Company's income from its Preferred Revenue Share. See
"Risk Factors -- Growth of Assets Under Management May Not Occur."
43
<PAGE> 45
The table below depicts the pro forma change in the Company's assets under
management (assuming all Affiliated Firms were included for the entire periods
presented).
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Assets under management --
Beginning of period..................................... $ 648 $ 1,177
Net new sales............................................. 356 65
Investment performance.................................... 173 51
Assets under management --
-------- --------
End of period........................................... $ 1,177 $ 1,293
======== ========
</TABLE>
THE AFFILIATED FIRMS
<TABLE>
<CAPTION>
ASSETS UNDER
EQUITY MANAGEMENT AS OF
DATE FORMED(2)/ OWNERSHIP MARCH 31, 1998
AFFILIATED FIRM INVESTMENT STYLE(1) DATE ACQUIRED PERCENTAGE (IN MILLIONS)
--------------- ---------------------- --------------- ---------- ----------------
<S> <C> <C> <C> <C>
Milestone...................... Hedged Mortgage- May 1993/ 99% $ 139
New York, NY Backed Securities July 1996
Trading
Trust Advisors................. Market Neutral July 1989/ 50% 242
Westport, CT Long/Short Equity; October 1996
Stable Value
Silverado...................... Convertible and Merger March 1997/ 50% 20
Saddle Brook, NJ Arbitrage March 1997
Bricoleur...................... Long/Short Equity October 1993/ 50% 304
San Diego, CA February 1998
JMG-Pacific.................... Diversified Market March 1992(3)/ 50% 282
Los Angeles and Neutral Arbitrage April 1998
San Francisco, CA
MET(4)......................... Event Driven, July 1992/ 50% 306
New York, NY Opportunistic Pending(4)
------
TOTAL....................................................................... $1,293
======
</TABLE>
- ---------------
(1) The paragraphs below provide descriptions of the Affiliated Firms and their
investment styles. The general terms "arbitrage," "hedging" and "market
neutral," as used herein, have the following meanings: (i) arbitrage means
purchasing securities while selling short other related securities to
attempt to exploit a perceived pricing inefficiency; (ii) hedging means
establishing investment positions the performance of which will tend to
offset that of other investment positions in an effort to reduce the effect
of broad market movements or other factors affecting securities prices; and
(iii) market neutral means a strategy which focuses on obtaining returns
with low or no correlation to the market.
(2) Date Affiliated Firm or predecessor firm formed.
(3) JMG Capital Management LLC's predecessor firm was formed in March 1992 and
Pacific Assets Management LLC's predecessor firm was formed in April 1996.
(4) On March 24, 1998, the Company entered into a definitive agreement to
acquire preferred interests in the MET management entities. The Company
presently anticipates that the MET Acquisition will close within 30 days
after the Offering.
44
<PAGE> 46
The following table sets forth consolidated assets under management of the
Affiliated Firms by type of investor on a pro forma basis as of March 31, 1998
(dollars in millions):
<TABLE>
<CAPTION>
ASSETS UNDER
MANAGEMENT CLIENTS
----------------- -----------------
AMOUNT PERCENT NUMBER PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Institutions:
Domestic.............................................. $ 359 27.8% 83 13.2%
Offshore.............................................. 209 16.2 88 14.0
High Net Worth Investors:
Domestic.............................................. 322 24.9 225 35.9
Offshore.............................................. 31 2.4 43 6.9
Fund of Funds........................................... 372 28.7 188 30.0
------ ----- --- -----
$1,293 100.0% 627 100.0%
====== ===== === =====
</TABLE>
The Affiliated Firms are described below in order of their respective dates
of acquisition or pending acquisition by Asset Alliance.
Milestone Global Advisors L.P.
Milestone was founded in May 1993 by Bruce H. Lipnick and Arnold L. Mintz,
the President and Executive Vice President of the Company, respectively.
Milestone identifies certain market inefficiencies in the mortgage-backed
securities markets and then creates hedged investments to profit from those
inefficiencies. Bear Stearns Investment Advisors, Inc. ("BSIA"), a subsidiary of
Bear, Stearns & Co. Inc., served as sub-adviser to Milestone's investment
vehicles from July 1996 until October 1997. On October, 1, 1997, Milestone
delegated to Westside Advisors ("Westside"), an entity unaffiliated with the
Company, full investment discretion in respect of Milestone's investment funds
and, in that connection, pays Westside a substantial portion of fees received.
See Note 5 to the Company's Consolidated Financial Statements. The senior
principals of Westside were previously responsible for managing Milestone's
portfolio on a non-discretionary basis while employed at BSIA. In the future,
Milestone may enter into additional mortgage related trading joint ventures with
specialized managers to develop new products.
Milestone's investment strategy is a market neutral, arbitrage approach to
investing in mortgage-backed securities. Milestone invests in high credit
quality mortgage-backed securities, consisting mostly of securities backed by
the full faith and credit of the U.S. government and securities of U.S.
government agencies which are not guaranteed by the U.S. government, with no
holdings rated lower than "AA" by Standard & Poor's. Securities and derivative
securities are purchased and sold short to achieve a net investment duration
close to (but which typically varies somewhat from) zero years. Duration is a
measure of time to maturity, with greater durations indicative of increased
sensitivity of investment values to interest rate changes. Milestone seeks to
identify and exploit the market inefficiencies presented by seasonal market
conditions and portfolio adjustments of dealers and major institutions. A
strategy of combining investments in "interest only" securities, which generally
rise in price as interest rates rise, and investments in "principal only"
securities, which generally fall in price as interest rates rise, is also
employed in an attempt to increase returns without accepting an associated
interest rate risk.
45
<PAGE> 47
MILESTONE GLOBAL ADVISORS L.P.
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES* FEES**
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1994 Second Quarter.................... $ 4,000,000 $ 3,031 $ 11,905 $ 14,936
Third Quarter..................... 14,000,000 11,225 27,590 38,815
Fourth Quarter.................... 13,000,000 10,232 49,565 59,797
-------- ---------- ----------
ANNUAL TOTAL.................................... $ 24,488 $ 89,060 $ 113,548
======== ========== ==========
1995 First Quarter..................... $ 18,000,000 $ 15,102 $ 76,399 $ 91,501
Second Quarter.................... 20,000,000 16,350 32,496 48,846
Third Quarter..................... 21,000,000 17,688 37,702 55,390
Fourth Quarter.................... 20,000,000 18,304 89,097 107,401
-------- ---------- ----------
ANNUAL TOTAL.................................... $ 67,444 $ 235,694 $ 303,138
======== ========== ==========
1996 First Quarter..................... $ 22,000,000 $ 18,624 $ 76,188 $ 94,812
Second Quarter.................... 24,000,000 19,776 113,879 133,655
Third Quarter..................... 33,000,000 59,823 260,137 319,960
Fourth Quarter.................... 39,000,000 94,058 388,199 482,257
-------- ---------- ----------
ANNUAL TOTAL.................................... $192,281 $ 838,403 $1,030,684
======== ========== ==========
1997 First Quarter..................... $ 69,000,000 $154,834 $ 782,884 $ 937,718
Second Quarter.................... 94,000,000 186,181 1,725,345 1,911,526
Third Quarter..................... 101,000,000 211,223 1,676,032 1,887,255
Fourth Quarter.................... 120,000,000 241,987 1,773,520 2,015,507
-------- ---------- ----------
ANNUAL TOTAL.................................... $794,225 $5,957,781 $6,752,006
======== ========== ==========
1998 First Quarter..................... $139,000,000 $277,813 $ 974,775 $1,252,588
======== ========== ==========
</TABLE>
- ---------------
* Performance fee figures represent amounts earned by Milestone in each
quarter.
** Total fee figures are gross of amounts payable to BSIA from the third quarter
of 1996 through the third quarter of 1997 of $3,711,867 and amounts payable
to Westside for the fourth quarter of 1997 of $1,489,780 and for the first
quarter of 1998 of $917,453.
Trust Advisors LLC
The predecessor to Trust Advisors was a traditional investment manager
founded in 1989 by Mark R. Tonucci and Michael E. Portnoy for the purpose of
managing stable value and collective trust assets. Trust Advisors currently
manages three separate alternative investment vehicles: Trust Advisors Stable
Value Plus Fund ("SVP"), Trust Advisors Equity Plus LLC ("Equity Plus") and Twin
Plus LLC ("Twin Plus"). After acquiring a preferred interest in Trust Advisors
in September 1996, the Company assisted in the conversion of SVP from a
traditional stable value fund to one employing alternative investment strategies
as described below.
SVP is a stable value fund investing in guaranteed investment contracts
("GICs") and synthetic GICs. The synthetic GICs held by SVP permit Trust
Advisors to allocate a percentage of assets to Equity Plus and to investment
vehicles managed by Milestone. The allocated assets are "wrapped" by a major
commercial bank to guarantee a minimum rate of return to SVP. Investment returns
from Equity Plus and the investment vehicles managed by Milestone in excess of
the minimum return guaranteed by the bank are passed through to SVP thereby
increasing the yield to investors.
With Equity Plus, Trust Advisors offers a long/short equity investment
program designed to be risk balanced and capable of achieving substantial
capital appreciation in both up and down markets. Trust
46
<PAGE> 48
Advisors allocates the capital of Equity Plus among Alternative Managers
unaffiliated with the Company that employ "market neutral" equity investment
strategies. Using this diversified approach to market neutral investing, Trust
Advisors seeks to access and benefit from the strategies and expertise of select
Alternative Managers.
Twin Plus is a recently established investment vehicle. The investment
objectives and methods of Twin Plus are substantially similar to those of Equity
Plus with the exception that the assets of Twin Plus are allocated to a single
underlying and unaffiliated Alternative Manager. In addition to managing its
investment vehicles, Trust Advisors provides asset management consulting
services to high net worth individuals, institutions and tax exempt
organizations.
TRUST ADVISORS LLC
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES* FEES
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1993 First Quarter..................... $274,000,000 $142,162 $ -- $ 142,162
Second Quarter.................... 281,000,000 146,631 -- 146,631
Third Quarter..................... 288,000,000 149,104 -- 149,104
Fourth Quarter.................... 288,000,000 152,180 -- 152,180
-------- -------- ----------
ANNUAL TOTAL.................................... $590,077 $ -- $ 590,077
======== ======== ==========
1994 First Quarter..................... $284,000,000 $146,197 $ -- $ 146,197
Second Quarter.................... 284,000,000 168,637 -- 168,637
Third Quarter..................... 276,000,000 164,502 -- 164,502
Fourth Quarter.................... 274,000,000 159,929 -- 159,929
-------- -------- ----------
ANNUAL TOTAL.................................... $639,265 $ -- $ 639,265
======== ======== ==========
1995 First Quarter..................... $268,000,000 $153,104 $ -- $ 153,104
Second Quarter.................... 265,000,000 166,458 -- 166,458
Third Quarter..................... 289,000,000 177,257 -- 177,257
Fourth Quarter.................... 284,000,000 177,343 -- 177,343
-------- -------- ----------
ANNUAL TOTAL.................................... $674,162 $ -- $ 674,162
======== ======== ==========
1996 First Quarter..................... $261,000,000 $172,728 -- $ 172,728
Second Quarter.................... 255,000,000 187,779 -- 187,779
Third Quarter..................... 241,000,000 238,166 -- 238,166
Fourth Quarter.................... 243,000,000 202,533 -- 202,533
-------- -------- ----------
ANNUAL TOTAL.................................... $801,206 $ -- $ 801,206
======== ======== ==========
1997 First Quarter..................... $249,000,000 $211,015 $ 71,650 $ 282,665
Second Quarter.................... 245,000,000 232,424 159,382 391,806
Third Quarter..................... 245,000,000 251,000 542,906 793,906
Fourth Quarter.................... 241,000,000 258,763 193,504 452,267
-------- -------- ----------
ANNUAL TOTAL.................................... $953,202 $967,442 $1,920,644
======== ======== ==========
1998 First Quarter..................... $242,000,000 $275,019 $270,315 $ 545,334
======== ======== ==========
</TABLE>
- ---------------
* Performance fee figures represent amounts earned by Trust Advisors in each
quarter. The Company assisted in the conversion of Trust Advisors from a
traditional manager to an Alternative Manager in the first quarter of 1997.
Prior to such time, Trust Advisors did not charge performance fees.
47
<PAGE> 49
Silverado Capital Management LLC
Silverado, the Company's first Experienced Manager Launch, was formed in
March 1997 by the Company and Jeffrey D. Cohen to manage investment vehicles
dedicated to convertible securities arbitrage and merger arbitrage. Mr. Cohen
has more than twenty years of experience analyzing and investing in the
convertible securities arbitrage and merger arbitrage areas. Mr. Cohen serves as
Silverado's Managing Director, and Sheri Kaplan, who has worked with Mr. Cohen
for eight years, is Silverado's Director of Arbitrage Trading.
Silverado uses convertible securities arbitrage in an effort to capture
positive cash flow from interest paying instruments while profiting from pricing
inefficiencies between convertible securities, including convertible bonds and
convertible preferred stocks, and the underlying common stocks. In addition to
convertible securities arbitrage investments, Silverado engages in merger
arbitrage. In a merger arbitrage transaction, Silverado invests in publicly
announced but not yet completed acquisition transactions in an effort to capture
the incremental returns typically available upon completion of the acquisitions.
Convertible arbitrage and merger arbitrage are investment strategies that
attempt to be market neutral and eliminate correlation with the movement of
broader stock market indices.
SILVERADO CAPITAL MANAGEMENT LLC
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES * FEES
------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
1997 Third Quarter........................ $ 9,000,000 $37,310 $ 8,135 $ 45,445
Fourth Quarter....................... 16,000,000 18,879 156,345 175,224
------- -------- --------
ANNUAL TOTAL......................... $56,189 $164,480 $220,669
======= ======== ========
1998 First Quarter........................ $20,000,000 $47,776 $ 32,406 $ 80,182
======= ======== ========
</TABLE>
- ---------------
* Performance fee figures represent amounts earned by Silverado in each quarter.
Bricoleur Capital Management LLC
Bricoleur's predecessor firm was founded in November 1993 by John I.
Bloomberg and Daniel P. Wimsatt. The firm focuses on achieving attractive
risk-adjusted "absolute" returns regardless of current trends in the overall
equity markets. Bricoleur invests primarily in U.S. equities and does not invest
in currencies, commodities or futures.
Bricoleur uses fundamental, bottom-up analysis in selecting securities,
focusing on, among other things, growth in earnings and margins, product and
industry positioning, cash flows and management strength. Bricoleur also
considers "technical" and "macro-economic" factors in its evaluation process.
Bricoleur primarily targets companies which are smaller and not widely followed
by the investment community. Bricoleur employs a model of contrarian,
diversified investing which essentially seeks to identify investments that are,
at the time of analysis, out of favor with other investors. Bricoleur seeks to
reduce the risk associated with such investments by employing various hedging
techniques such as selling short companies which it believes are currently
overvalued.
48
<PAGE> 50
BRICOLEUR CAPITAL MANAGEMENT LLC*
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES ** FEES
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1994 First Quarter................... $ 22,000,000 $ 6,700 $ 212,644 $ 219,344
Second Quarter.................. 25,000,000 7,400 225,838 233,238
Third Quarter................... 26,000,000 12,900 385,585 398,485
Fourth Quarter.................. 30,000,000 21,200 89,965 111,165
---------- ----------- -----------
ANNUAL TOTAL.................... $ 48,200 $ 914,032 $ 962,232
========== =========== ===========
1995 First Quarter................... $ 36,000,000 $ 34,400 $ 493,024 $ 527,424
Second Quarter.................. 42,000,000 48,600 574,329 622,929
Third Quarter................... 56,000,000 82,700 1,123,211 1,205,911
Fourth Quarter.................. 65,000,000 102,500 441,862 544,362
---------- ----------- -----------
ANNUAL TOTAL.................... $ 268,200 $ 2,632,426 $ 2,900,626
========== =========== ===========
1996 First Quarter................... $ 86,000,000 $ 150,532 $ 2,012,465 $ 2,162,997
Second Quarter.................. 104,000,000 193,565 1,555,835 1,749,400
Third Quarter................... 114,000,000 218,665 118,869 337,534
Fourth Quarter.................. 126,000,000 244,697 1,658,010 1,902,707
---------- ----------- -----------
ANNUAL TOTAL.................... $ 807,459 $ 5,345,179 $ 6,152,638
========== =========== ===========
1997 First Quarter................... $140,000,000 $ 265,320 $ 1,898,235 $ 2,163,555
Second Quarter.................. 171,000,000 328,027 5,196,330 5,524,357
Third Quarter................... 213,000,000 407,341 3,364,737 3,772,078
Fourth Quarter.................. 246,000,000 457,285 478,363 935,648
---------- ----------- -----------
ANNUAL TOTAL.................... $1,457,973 $10,937,665 $12,395,638
========== =========== ===========
1998 First Quarter................... $304,000,000 $ 540,630 $ 3,971,626 $ 4,512,256
========== =========== ===========
</TABLE>
- ---------------
* Included in the period end assets under management and performance fees are
amounts earned by the Principals of Bricoleur for acting as sub-advisor to
JIB Associates ("JIB"), which are not reflected in the historical financial
statements of Bricoleur as of and for the years ended December 31, 1996 and
1997 included elsewhere in this Prospectus. Effective January 1, 1998, such
amounts are reflected in the operations of Bricoleur.
** Performance fee figures represent amounts earned by Bricoleur in each
quarter.
JMG Capital Management LLC and Pacific Assets Management LLC
The predecessor firm of JMG Capital Management LLC ("JMG Capital") was
founded in March 1992 by its principal, Jonathan M. Glaser. The predecessor firm
of Pacific Assets Management LLC ("Pacific" and, collectively with JMG Capital,
"JMG-Pacific") was founded in April 1996 by its principals, Jonathan M. Glaser,
Roger Richter and Daniel David. In general, JMG-Pacific provides investment
advisory services domestically through JMG Capital and offshore through Pacific.
JMG-Pacific emphasizes conservative strategies with a goal of achieving
consistent returns to investors in different market environments. In seeking its
objective, JMG-Pacific employs a broad range of investment strategies, including
hedged options strategies, convertible arbitrage, capital structure arbitrage
and merger and acquisition arbitrage.
JMG-Pacific seeks to structure its portfolios to take advantage of market
volatility and price anomalies between highly correlated or substantially
similar securities. In creating its investment portfolios, JMG-Pacific
de-emphasizes fundamental research and economic forecasting and does not attempt
to rely on accurately predicting market direction or the fortunes of an
individual company.
49
<PAGE> 51
JMG-Pacific seeks portfolio investments that allow it to apply hedging
techniques in an effort to reduce a high percentage of position risk and that
are perceived to be capable of generating consistent rates of return over full
market cycles. JMG-Pacific utilizes options strategies as a method to enhance
both returns and hedge positions.
JMG CAPITAL MANAGEMENT LLC AND PACIFIC ASSETS MANAGEMENT LLC
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES * FEES
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1993 First Quarter.................... $ 2,000,000 $ 4,246 $ 27,369 $ 31,615
Second Quarter................... 3,000,000 5,345 39,615 44,960
Third Quarter.................... 4,000,000 8,282 133,381 141,663
Fourth Quarter................... 7,000,000 14,796 89,738 104,534
---------- ---------- -----------
ANNUAL TOTAL..................... $ 32,669 $ 290,103 $ 322,772
========== ========== ===========
1994 First Quarter.................... $ 11,000,000 $ 29,164 $ 88,245 $ 117,409
Second Quarter................... 13,000,000 31,915 107,699 139,614
Third Quarter.................... 17,000,000 42,297 185,746 228,043
Fourth Quarter................... 21,000,000 54,192 191,390 245,582
---------- ---------- -----------
ANNUAL TOTAL..................... $ 157,568 $ 573,080 $ 730,648
========== ========== ===========
1995 First Quarter.................... $ 36,000,000 $ 89,485 $ 382,149 $ 471,634
Second Quarter................... 38,000,000 95,897 304,567 400,464
Third Quarter.................... 41,000,000 100,596 672,202 772,798
Fourth Quarter................... 44,000,000 102,507 617,797 720,304
---------- ---------- -----------
ANNUAL TOTAL..................... $ 388,485 $1,976,715 $ 2,365,200
========== ========== ===========
1996 First Quarter.................... $ 49,000,000 $ 121,017 $ 764,669 $ 885,686
Second Quarter................... 64,000,000 155,639 1,108,106 1,263,745
Third Quarter.................... 86,000,000 237,710 759,142 996,852
Fourth Quarter................... 110,000,000 317,813 1,078,886 1,396,699
---------- ---------- -----------
ANNUAL TOTAL..................... $ 832,179 $3,710,803 $ 4,542,982
========== ========== ===========
1997 First Quarter.................... $122,000,000 $ 341,418 $1,628,045 $ 1,969,463
Second Quarter................... 158,000,000 458,431 2,224,864 2,683,295
Third Quarter.................... 192,000,000 618,293 3,385,740 4,004,033
Fourth Quarter................... 257,000,000 885,736 2,395,247 3,280,983
---------- ---------- -----------
ANNUAL TOTAL..................... $2,303,878 $9,633,896 $11,937,774
========== ========== ===========
1998 First Quarter.................... $282,000,000 $1,032,748 $3,208,785 $ 4,241,533
========== ========== ===========
</TABLE>
- ---------------
* Performance fee figures represent amounts earned by JMG-Pacific in each
quarter.
Metropolitan Capital Managers LLC, Metropolitan Capital Managers II LLC and
Metropolitan Capital Advisors LLC
The predecessor firms of Metropolitan Capital Managers LLC ("Metropolitan
Managers"), Metropolitan Capital Managers II LLC ("Metropolitan Managers II")
and Metropolitan Capital Advisors LLC ("Metropolitan Advisors" and, collectively
with Metropolitan Managers and Metropolitan Managers II, "MET") were founded in
May 1992 by Jeffrey Schwarz and Karen Finerman. In general, MET provides
investment advisory services domestically through Metropolitan Advisors and
offshore through Metropolitan Managers. MET seeks to achieve capital
appreciation while maintaining a conservative risk profile.
50
<PAGE> 52
MET emphasizes opportunities created by significant transitional events in
the corporate life cycle including spin-offs, divestitures, mergers and
acquisitions, reorganizations and bankruptcies, recapitalizations and share
buybacks. MET also considers management changes, overall industry changes and
disappointing announcements causing analysts to change their expectations and
the shareholder base to turn over as potential investment opportunities. Once an
attractive opportunity has been identified, MET searches for the most effective
instrument available to create the desired risk/reward profile for that given
investment. MET invests in equity and debt securities, including publicly traded
stocks, warrants and rights, listed and over-the-counter options, corporate and
government bonds, debentures and convertible securities, bank loans and trade
claims and privately-placed securities.
MET's strategy includes, among other things, value investing with a focus
on event-oriented opportunities, traditional risk arbitrage and distressed
securities investing. In select instances, MET will endeavor to be an activist
investor, seeking to provide the catalyst necessary to unlock value when there
appears to be no other agent for change. Elements of this proactive strategy may
include buying large blocks of stock, identifying industry buyers and running
proxy contests.
MET also employs various hedging strategies in an effort to reduce the
exposure of its investment portfolio to market volatility.
METROPOLITAN CAPITAL MANAGERS LLC, METROPOLITAN CAPITAL MANAGERS II LLC
AND METROPOLITAN CAPITAL ADVISORS LLC
<TABLE>
<CAPTION>
PERIOD END
ASSETS UNDER MANAGEMENT PERFORMANCE TOTAL
MANAGEMENT FEES FEES * FEES
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1993 First Quarter.................... $ 9,000,000 $ -- $ 147,267 $ 147,267
Second Quarter................... 11,000,000 -- 162,632 162,632
Third Quarter.................... 13,000,000 -- 227,224 227,224
Fourth Quarter................... 16,000,000 -- 128,148 128,148
---------- ---------- -----------
ANNUAL TOTAL..................... $ -- $ 665,271 $ 665,271
========== ========== ===========
1994 First Quarter.................... $ 20,000,000 $ -- $ 147,321 $ 147,321
Second Quarter................... 21,000,000 -- 150,674 150,674
Third Quarter.................... 25,000,000 -- 283,920 283,920
Fourth Quarter................... 25,000,000 -- (187,954) (187,954)
---------- ---------- -----------
ANNUAL TOTAL..................... $ -- $ 393,961 $ 393,961
========== ========== ===========
1995 First Quarter.................... $ 49,000,000 $ 217,142 $ 455,861 $ 673,003
Second Quarter................... 55,000,000 242,296 770,782 1,013,078
Third Quarter.................... 65,000,000 289,634 952,307 1,241,941
Fourth Quarter................... 67,000,000 325,519 587,174 912,693
---------- ---------- -----------
ANNUAL TOTAL..................... $1,074,591 2,766,124 $ 3,840,715
========== ========== ===========
1996 First Quarter.................... $ 90,000,000 $ 389,402 $1,342,551 $ 1,731,953
Second Quarter................... 98,000,000 445,654 767,072 1,212,726
Third Quarter.................... 120,000,000 515,759 1,832,324 2,348,083
Fourth Quarter................... 133,000,000 599,801 2,048,193 2,647,994
---------- ---------- -----------
ANNUAL TOTAL..................... $1,950,616 $5,990,140 $ 7,940,756
========== ========== ===========
1997 First Quarter.................... $174,000,000 $1,046,877 $2,255,784 $ 3,302,661
Second Quarter................... 206,000,000 1,063,604 1,619,862 2,683,466
Third Quarter.................... 265,000,000 940,453 4,274,345 5,214,798
Fourth Quarter................... 297,000,000 1,013,821 1,448,511 2,462,332
---------- ---------- -----------
ANNUAL TOTAL..................... $4,064,755 $9,598,502 $13,663,257
========== ========== ===========
1998 First Quarter.................... $306,000,000 $1,267,274 $2,331,540 $ 3,598,814
========== ========== ===========
</TABLE>
- ---------------
* Performance fee figures represent amounts earned by MET in each quarter.
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<PAGE> 53
COMPETITION
The Company believes the market for acquisitions of Alternative Managers to
be a developing market which presently involves few competitors, none of which
appears to be a significant competitor. The Company is aware of other holding
companies which have been organized to invest in or acquire Alternative Managers
but these firms have engaged in limited activities to date. Nonetheless, the
Company views these firms as among its potential competitors. In addition,
numerous other companies, both privately and publicly held, including commercial
and investment banks, insurance companies and investment management firms, many
of which have longer established operating histories and significantly greater
resources than the Company, make investments in and acquire investment
management firms. There can be no assurance that these companies will not enter
or increase their activities in the market for acquisitions of Alternative
Managers. The longer operating histories and greater resources of these
companies may make them more attractive to the owners of firms in which Asset
Alliance is considering an investment and may enable them to offer greater
consideration to such owners. The Company believes that important factors
affecting its ability to compete for future acquisitions are (i) the degree to
which target firms view the Asset Alliance acquisition structure as preferable,
financially and operationally, to acquisition or investment arrangements offered
by other potential purchasers, (ii) the market value of the Common Stock, which
may be a form of consideration in acquisitions, (iii) the attractiveness of
Alternative Managers to other acquirers and (iv) the reputation and performance
of the existing and future Affiliated Firms, by which target firms will judge
Asset Alliance and its future prospects.
The investment management business also is highly competitive. Each of the
Affiliated Firms competes with a broad range of investment managers for client
assets, including public and private investment advisers as well as affiliates
of securities broker-dealers, banks, insurance companies and other Alternative
Managers. The Company believes there are approximately 3,000 domestic
Alternative Managers. Many of the Affiliated Firms' competitors have greater
resources and assets under management than any of the Affiliated Firms or the
Affiliated Firms and the Company combined. In addition, there are relatively few
barriers to entry into the alternative asset management business by new
Alternative Managers. Asset Alliance believes that the most important factors
affecting the Affiliated Firms' ability to compete for clients are (i) the
investment strategies offered, (ii) the abilities, performance records and
reputation of their Principals and (iii) the level of client service offered. Of
lesser importance are (i) the level of performance allocations and management
fees, and (ii) 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 Affiliated Firm's ability to retain and
increase assets under management and to enhance revenues would be adversely
affected if client accounts underperform in comparison to relevant benchmarks,
or if Principals or other key employees leave the Affiliated Firm. The ability
of each Affiliated Firm 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.
EMPLOYEES
As of March 31, 1998, the Company employed twelve persons, nine of whom are
full-time employees. The Company is not subject to any collective bargaining
agreements and the Company believes its labor relations are satisfactory.
PROPERTIES
Asset Alliance's executive offices are located at 800 Third Avenue, New
York, New York 10022, where it occupies approximately 10,800 square feet under a
lease expiring in June 2008. Each of the Affiliated Firms also leases office
space for their principal offices. The Company believes that its facilities are
adequate for its present and currently foreseeable needs.
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<PAGE> 54
REGULATION
The business of the Affiliated Firms is highly regulated. An Affiliated
Firm's failure to comply with applicable laws or regulations could result in
fines, suspensions of individual employees or other sanctions, including
revocation of an Affiliated Firm's registration as an investment adviser or
broker-dealer (where applicable). Such actions could materially and adversely
affect the Company. Federal laws applicable to one or more of the Affiliated
Firms include the Advisers Act, ERISA, the Exchange Act and certain exceptions
to registration of investment funds under the Investment Company Act. Milestone,
Trust Advisors and Bricoleur are each registered with the Commission as an
investment adviser under the Advisers Act or with a state under the applicable
state statute governing investment advisers, and are subject to the provisions
of investment advisory regulations and regulatory oversight and exam. These
regulations impose numerous obligations on registered investment advisers,
including fiduciary, record keeping, operational and disclosure obligations.
Certain Affiliated Firms are subject to ERISA, and to regulations promulgated
thereunder, because 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 Affiliated Firm, as well as certain
transactions by the fiduciaries (and certain other related parties) to such
plans. Each of Asset Alliance Investment Services Inc., a wholly-owned
subsidiary of the Company, Equity Plus Ltd., Twin Trust Trading LLC, JMG
Convertible Investments, L.P., Silverado Arbitrage Trading Ltd. and Equity Plus
is registered or is in the process of registering under 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.
Recent amendments to the federal securities laws will affect the
alternative investment management business. The National Securities Improvement
Act of 1996, among other things, added Section 3(c)(7) to the Investment Company
Act, creating a new type of private investment company that, despite having more
than 100 investors, does not have to register with the Commission under the
Investment Company Act (each, a "Section 3(c)(7) Fund"). Section 3(c)(7) Funds
are available to certain "qualified purchasers" (as defined in the Investment
Company Act) and are exempt from certain performance fee restrictions in the
Advisers Act. The Company believes that the authority to create Section 3(c)(7)
Funds provides Alternative Managers with additional flexibility in increasing
their assets under management.
Asset Alliance 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.
LEGAL PROCEEDINGS
From time to time, the Company and the Affiliated Firms may be parties to
various claims, suits and complaints. Currently, neither the Company nor any of
the Affiliated Firms is a party to any material legal proceedings.
TRADEMARKS
The Company has filed applications for trademarks for "Asset Alliance
Corporation" and the Company's logo, "Trust Advisers Equity Plus" and its logo
and "Preferred Manager Trust" with the United States Patent and Trademark
Office. The Company anticipates that federal registration of such marks will be
granted.
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<PAGE> 55
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 financial
statements and notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
Asset Alliance is an investment management holding company that acquires
preferred interests in privately owned investment management firms specializing
in alternative investment strategies ("Alternative Managers"). The Company
generally purchases a 50% equity interest in a given firm and is granted a
preferred right to a comparable percentage of the firm's revenues (the
"Preferred Revenue Share"). The Company's goal is to build a large and
diversified family of Alternative Managers each possessing a high degree of
expertise in its chosen investment discipline.
The Company derives its revenues from its ownership of the preferred
interests in the Alternative Managers in which it acquires an interest (the
"Affiliated Firms"). The Company has a revenue sharing arrangement with each
Affiliated Firm, which is set forth in the Organizational Documents of each such
Affiliated Firm. These arrangements generally provide for a Preferred Revenue
Share to Asset Alliance and require the Affiliated Firm to distribute such
amounts to Asset Alliance on a preferred basis at specified time intervals. All
remaining revenues of the Affiliated Firm are allocated to the Principals of the
firm (the "Principals' Allocation"). The Principals' Allocation generally is
required to be used first to pay all expenses of the Affiliated Firm, including
salaries, and to fund reserves and, thereafter, may be distributed to the
Principals. In certain circumstances, a set amount of expense or actual expense
up to a certain limit is deducted from gross revenues before the Preferred
Revenue Share is distributed to the Company. Presently, across all of the
Affiliated Firms, the maximum expense deductions for any given year may not
exceed an aggregate of $600,000.
The Affiliated Firms generate substantially all their revenues from two
sources: asset-based fees and performance-based fees. Asset-based fees entitle
the Affiliated Firms to a fee based upon a specified percentage (generally 1% to
2% per annum) of their assets under management. Performance-based fees entitle
the Affiliated Firms to a specified percentage (generally a minimum of 20% per
annum) of the annual incremental positive investment performance of their assets
under management. Historically, asset-based fees are paid quarterly in arrears,
while performance-based fees are paid annually. See "-- Certain Accounting
Considerations."
The revenue sharing arrangements among the Company and the Principals are
designed to align the strategic and financial goals of the Principals with those
of the Company. As an Affiliated Firm increases revenues, either through
increasing assets under management or through investment performance, both the
Principals' Allocation and the Preferred Revenue Share will increase. The
revenue sharing arrangements also provide ongoing incentives for the Principals
to control operating expenditures. The Principals are expected to manage the
business in a manner such that the Principals' Allocation is sufficient to pay
all expenses of the business. If the Principals' Allocation is insufficient to
pay expenses, the Principals must adjust expenses or contribute additional
capital, and the Preferred Revenue Share is not affected unless all other
sources have been exhausted.
CERTAIN ACCOUNTING CONSIDERATIONS
The Affiliated Firms generally are entitled to receive annual incentive
fees on positive investment performance or performance beyond a specified rate
of return, which are accrued as revenues. The accrual of such revenues generally
represents revenues the Affiliated Firms would have earned if performance-based
fees were payable as of the date of accrual instead of on an annual basis. The
Affiliated Firms generally will accrue revenues from incentive fees on a
quarterly basis. Realization of the incentive fee accrual is subject to the
Affiliated Firm maintaining the positive investment performance through the end
of the applicable period, which is generally annual. If an Affiliated Firm fails
to maintain the positive investment performance or the
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<PAGE> 56
investment performance falls below any applicable hurdle rate, subsequent
incentive fee accruals will be negative and offset prior positive incentive fee
accruals.
The incentive fee accrual is directly correlated with investment
performance. Therefore, variations in quarterly investment performance by an
Affiliated Firm will result in volatility in the amount of the corresponding
incentive fee accrual by the Company with respect to that particular Affiliated
Firm.
As a result of the Preferred Revenue Shares, Asset Alliance will be
required to record its share of the incentive fee accruals of each of the
Affiliated Firms, and such amounts likely will represent substantially all of
the Company's revenues. Therefore, volatility in the performance of the
Affiliated Firms will result in fluctuations, which could be significant, in the
Company's quarterly revenues and may result in the Company's revenue stream
becoming more volatile than is characteristic of other investment management
firms or investment management holding companies. Accordingly, the Company seeks
to acquire preferred interests in Alternative Managers it believes likely to
achieve consistent returns and to diversify its investments in Affiliated Firms
across a broad range of investment strategies that are not highly correlated, so
as to increase the likelihood of achieving more consistent revenues. However,
there can be no assurance that the Company's acquisition strategy or such
diversification will successfully insulate the Company from the potential
volatility in its revenue stream. See "Risk Factors -- The Company's Quarterly
Results May Fluctuate Significantly" and "-- Unfavorable Performance by the
Affiliated Firms Would Adversely Affect the Company."
The Preferred Revenue Shares are included in the Company's historical
financial statements from the respective acquisition dates of the Affiliated
Firms. The Company accounts for the Affiliated Firms on an unconsolidated basis
using the equity method, except that Milestone, which is 99% owned by the
Company, is consolidated. Therefore, other than with respect to Milestone, the
principal effects on the Company's financial statements of the ongoing
activities of the Affiliated Firms are the gross revenues allocated to the
Company, the amortization and depreciation of contracts and other acquired
assets, and the associated tax expense reflected in the Company's statements of
operations.
The Company's profitability will be determined by a number of factors, the
most important of which are the investment performance of its Affiliated Firms
and the level of assets under their management. The other principal factors
affecting profitability are: (i) the terms upon which the Company is able to
acquire additional Alternative Managers; (ii) the cost of the capital with which
the Company finances its acquisitions; (iii) the level of intangible assets and
the associated amortization expense resulting from the Company's acquisition of
preferred interests in Alternative Managers; (iv) the level of corporate
expenses incurred by the Company, including employee compensation, rent and
professional fees; and (v) taxes paid by the Company.
RECENT AND PENDING ACQUISITIONS
Bricoleur Capital Management LLC
On February 28, 1998, the Company acquired a preferred interest in
Bricoleur. The purchase price paid for Bricoleur (the "Bricoleur Purchase
Price") was $17.55 million in cash, 2,880,000 shares of Common Stock and $5.85
million principal amount of the Company's subordinated convertible debentures
(the "Bricoleur Debentures"), which are initially convertible into 780,000
shares of Common Stock. The Preferred Revenue Share in Bricoleur entitles the
Company to a 50% equity ownership interest and a 50% preferred share of the
gross revenues of Bricoleur.
The Bricoleur Purchase Price is subject to adjustment based on the
aggregate revenues of Bricoleur to which the Company is entitled through
December 31, 1999. If revenues exceed a minimum benchmark, the Principals of
Bricoleur will be entitled to receive additional shares of Common Stock. If
revenues are less than the minimum benchmark, the Principals of Bricoleur will
be obligated to make a payment to the Company in cash or in shares of Common
Stock in an amount equal to the shortfall. The purchase price adjustment is
subject to a cap of $5 million with the shares of Common Stock being valued at
their recent average trading price or a minimum price, whichever is greater.
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In connection with the Bricoleur Acquisition, the Company also agreed to
make certain earn-out payments to the Principals of Bricoleur based on Bricoleur
achieving targeted levels of assets under management and the Company realizing
specified levels of revenues therefrom. The earn-out payments consist of (i) a
one-time cash payment of $1.5 million upon Bricoleur achieving a specified level
of assets under management, and (ii) the issuance of options to purchase shares
of Common Stock in connection with increases in assets under management by
Bricoleur which also result in increases in revenues to the Company above a
minimum amount. Options can be earned over a five-year period and are issued at
an initial exercise price equal to fair market value on the date of grant. The
initial exercise price of options that may be issued to the Principals of
Bricoleur pursuant to the earn-out provisions is limited to $7 million.
The Bricoleur Debentures mature on February 28, 2000 and are convertible
into shares of Common Stock at the option of the Principals of Bricoleur at any
time.
In connection with the Bricoleur Acquisition, the Principals of Bricoleur
entered into five-year employment agreements with Bricoleur under which the
Company is a third-party beneficiary. The Principals of Bricoleur also agreed to
maintain minimum investments of an aggregate of $10 million of their personal
funds in the investment vehicles which they manage for so long as they retain an
ownership interest in Bricoleur.
JMG Capital Management LLC and Pacific Assets Management LLC
On April 28, 1998, the Company acquired a preferred interest in
JMG-Pacific. The purchase price paid for JMG-Pacific (the "JMG-Pacific Purchase
Price") was $29.85 million in cash, $14.93 million principal amount of the
Company's Series A Subordinated Convertible Debentures (the "Series A
Debentures") and $14.93 million principal amount of the Company's Series B
Subordinated Convertible Debentures (the "Series B Debentures" and, collectively
with the Series A Debentures, the "JMG-Pacific Debentures"). The Preferred
Revenue Share in JMG-Pacific entitles the Company to a 50% equity ownership
interest and a 50% preferred share of the gross revenues of JMG-Pacific.
The Series A Debentures mature on April 30, 2003 and are initially
convertible into 1,705,970 shares of Common Stock at the option of the
Principals of JMG-Pacific at any time after April 28, 1999. The Series B
Debentures mature on April 30, 2003 and are initially convertible into 1,705,970
shares of Common Stock at the option of the Principals of JMG-Pacific at any
time after the entire principal amount of the Series A Debentures have been
converted.
The JMG-Pacific Purchase Price is subject to adjustment based on the
aggregate revenues of JMG-Pacific to which the Company is entitled through
December 31, 1999. If such revenues exceed a minimum benchmark, the Principals
of JMG-Pacific will be entitled to receive additional consideration in cash or,
at the Company's election, in shares of Common Stock. If revenues fall short of
the minimum benchmark, the Principals of JMG-Pacific will be required to repay a
portion of the JMG-Pacific Purchase Price in cash or, at any such Principal's
election, in Series A Debentures, Series B Debentures or shares of Common Stock.
The purchase price adjustment is subject to a cap of $5.25 million with the
shares of Common Stock being valued at their recent average trading price.
The JMG-Pacific Purchase Price is also subject to a one-time reduction
based on the revenues as of July 1998 of Pacific Capital Management, Inc., an
entity controlled by JMG-Pacific ("PCM"). If PCM's revenues expressed as a
percentage of fee paying assets under management do not equal or exceed a
minimum benchmark, the Principals of JMG-Pacific will be obligated to pay the
Company an amount determined by the magnitude of such shortfall. This purchase
price adjustment is subject to an aggregate cap of $5.2 million and is payable
in cash and through the surrender of a portion of the JMG-Pacific Debentures.
The JMG-Pacific Purchase Price also may be adjusted upward and the Company
may incur a contingent payment obligation to the Principals of JMG-Pacific no
earlier than April 2001 and in an amount not in excess of $10 million. This
contingent payment is based on whether certain shares of Common Stock are freely
tradeable under the Securities Act and the market performance of the Common
Stock.
In connection with the JMG-Pacific Acquisition, the Principals of
JMG-Pacific entered into five-year employment agreements with JMG-Pacific under
which the Company is a third-party beneficiary. The
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<PAGE> 58
Principals of JMG-Pacific also agreed to maintain minimum investments of an
aggregate of $15 million of their personal funds in the investment vehicles
which they manage for so long as they retain an ownership interest in
JMG-Pacific.
Metropolitan Capital Managers LLC, Metropolitan Capital Managers II LLC and
Metropolitan Capital Advisors LLC
On March 24, 1998, the Company entered into definitive agreements to
consummate the MET Acquisition. The Company expects that the MET Acquisition
will close within 30 days after the Offering. The consummation of the MET
Acquisition is subject to the satisfaction of usual and customary closing
conditions.
The purchase price payable for the Company's interests in the MET entities
(the "MET Purchase Price") is expected to be approximately $17.85 million in
cash (the "MET Cash Consideration") and $17.85 million principal amount of the
Company's subordinated convertible debentures (the "MET Debentures"). The
Preferred Revenue Share in the MET entities will entitle the Company to a 50%
equity ownership interest and a 40% preferred share of the gross revenues of the
MET entities.
The MET Debentures mature on the fifth anniversary of the MET Acquisition
and are initially convertible into 1,785,000 shares of Common Stock at the
option of the Principals of MET at any time after the first anniversary of the
MET Acquisition.
The MET Purchase Price is subject to adjustment based on future events. The
MET Cash Consideration may be increased or decreased if the level of assets
under management by the MET entities as of the closing of the MET Acquisition do
not fall within a specified range. Similarly, the conversion price of the MET
Debentures may be increased or decreased based on the initial public offering
price of the shares of Common Stock to be sold in this Offering. Based on the
assumed initial public offering price of $12.00 per share, no adjustment to the
conversion price of the MET Debentures would be made. Similarly, the Company
does not currently anticipate that any material adjustment to the MET Cash
Consideration will occur.
The MET Purchase Price also is subject to a purchase price adjustment based
on aggregate revenues of the MET entities to which the Company is entitled
through June 30, 2000. If such revenues fall short of a minimum benchmark, the
Principals of the MET entities will be required to surrender MET Debentures
convertible into shares of Common Stock with a value equal to the revenue
shortfall. If such revenues exceed the minimum benchmark, the Principals of the
MET entities will be entitled to shares of Common Stock or, in certain cases,
cash, with a value equal to the revenue excess. The revenue purchase price
adjustment is subject to a cap of $5.0 million.
In connection with the MET Acquisition, the Principals of the MET entities
are expected to enter into five-year employment agreements with the MET entities
under which the Company will be a third-party beneficiary. The Principals also
agreed to maintain minimum investments of an aggregate of $10 million in the
investment vehicles which they manage for the duration of their employment by
the MET entities.
On a pro forma basis for the year ended December 31, 1997, the Bricoleur
Acquisition, the JMG-Pacific Acquisition and the MET Acquisition contributed
$6.2 million, $6.0 million and $5.5 million to the Company's gross revenues,
respectively.
PRIOR ACQUISITIONS
In July 1996, the Company acquired one-half of the outstanding capital
stock of Milestone Investment Group Inc. ("MIG") from Messrs. Lipnick and Mintz.
The remainder of the capital stock of MIG was contributed to the Company by
Messrs. Lipnick and Mintz as a capital contribution. See "Certain Relationships
and Related Party Transactions." The principal asset of MIG is a 99% limited
partnership interest in Milestone. Pursuant to a stock purchase agreement (the
"Milestone Agreement"), ownership of MIG was transferred to the Company in
exchange for 2,500,000 shares of Common Stock, $637,500 in cash, warrants to
purchase 350,000 shares of the Common Stock, contingent earn-out payments and
contingent stock options. No contingent earn-out payments were made and no
contingent stock options were issued in
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1996. Contingent earn-out payments for 1997 were $637,500, and contingent stock
options for 21,250 shares were issued for 1997. No further earn-out payments or
contingent stock option issuances are payable under the Milestone Agreement. The
contingent stock options currently have a $7.50 per share exercise price. These
options reprice to one-half of the offering price upon consummation of the
Offering, which will result in a charge to operations for such repricing equal
to the number of shares that may be obtained upon the exercise of these options
multiplied by one-half of the offering price, less associated tax benefits to
the Company.
In October 1996, the Company acquired a preferred interest in Trust
Advisors. The purchase price consisted of $600,000 in cash, 175,000 shares of
Common Stock, warrants exercisable for 35,000 shares of Common Stock at an
exercise price of $5.00 per share and $750,000 principal amount of the Company's
subordinated convertible debentures, which are initially convertible into 50,000
shares of Common Stock. The Principals of Trust Advisors are eligible to receive
contingent stock options in connection with increases in revenues through the
year 2001 in an aggregate amount not to exceed $500,000 in initial exercise
price. Upon the consummation of the Offering, the initial exercise price of
contingent stock options previously granted to the Principals of Trust Advisors
will automatically be adjusted to equal one-half the initial public offering
price. The initial exercise price of contingent stock options granted to the
Principals of Trust Advisors after the Offering will be fair market value.
Contingent stock options to purchase an aggregate of 15,344 shares of Common
Stock were granted to the Principals of Trust Advisors for 1996 and 1997. The
contingent stock options currently have a $7.50 per share exercise price. These
options reprice to one-half of the offering price upon consummation of the
Offering, which will result in a charge to operations for such repricing equal
to the number of shares that may be obtained upon the exercise of these options
multiplied by one-half of the offering price, less associated tax benefits to
the Company.
The Company's acquisitions of 50% preferred interests are accounted for,
or, with respect to the MET Acquisition, will be accounted for, under the equity
method of accounting from the date of the respective acquisitions. The purchase
price is allocated based on the fair value of the net assets acquired, primarily
investment advisory contracts and other intangibles, which represent the excess
of the purchase price of the investments over the underlying equity in such
investments. The cost assigned to contracts acquired is amortized using the
straight-line method over periods ranging from seven to twenty years. The
Company reviews each individual investment on a regular basis to determine if
the remaining amortizable period should be accelerated. In determining the
remaining amortization period for intangible assets acquired, the Company
considers a number of factors relating to each Affiliated Firm including:
historical and potential future operating performance, client retention rates,
past and expected future investment performance, characteristics of products and
investment styles and the stability and depth of the management team.
Amortization of contracts and other intangibles will have a negative effect on
the Company's results of operations. See "Risk Factors -- The Company Could Be
Adversely Affected by Write-Offs of Investments in Affiliated Firms."
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
The Company had net income of $410,000 for the three months ended March 31,
1998, compared to net income of $89,000 for the three months ended March 31,
1997. Net revenues for the three months ended March 31, 1998 increased to $2.6
million from $1.1 million for the three months ended March 31, 1997. The revenue
increase was primarily due to an increase in Milestone's assets under management
resulting in revenues of $1.3 million for the three months ended March 31, 1998
compared to $938,000 for the three months ended March 31, 1997 and the inclusion
of the Preferred Revenue Share from Bricoleur of $1.2 million for the period
from February 28, 1998, the date of the Bricoleur Acquisition.
Sub-advisory fees paid increased to $951,000 for the three months ended
March 31, 1998, from $654,000 for the three months ended March 31, 1997. The
fees paid for the first quarter of 1998 consisted entirely of fees paid by
Milestone to Westside and for the first quarter of 1997 consisted entirely of
fees paid by Milestone to BSIA. Compensation and related expense increased by
$450,000 for the three months ended March 31, 1998, to $645,000 from $195,000
for the three months ended March 31, 1997, as a result of new employment
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agreements with the Company's senior executives, and an increased level of
staffing. Similarly, other operating expenses increased to $205,000 for the
three months ended March 31, 1998 from $128,000 for the three months ended March
31, 1997.
Net interest income (expense) was not significant for either the three
months ended March 31, 1998 or the three months ended March 31, 1997.
Year Ended December 31, 1997 Compared to Period Ended December 31, 1996
In its first full calendar year of operations, the Company had net income
of $564,000, compared to a net loss of $59,000 for the period from February 1,
1996 (date of inception) to December 31, 1996. Net revenues were $8.1 million in
1997, as compared to $978,000 in 1996. The primary cause of the increased
revenue level was the increase in assets under management by Milestone. The
portion of the Company's revenues representing management fees earned by
Milestone totaled $6.8 million in 1997 compared to revenues of $804,000 in 1996.
Also contributing to the increase in the Company's revenues in 1997 was an
increase in the amount of management fees earned by Trust Advisors, attributable
in large part to the introduction of new investment vehicles, as well as the
establishment of Silverado. The Company's share of gross revenues from Trust
Advisors increased to $960,000 in 1997 from $101,000 in 1996. The Company held a
preferred interest in Trust Advisors for only three months in 1996. The
Company's share of gross revenues from Silverado for 1997 were $88,000.
Sub-advisory fees paid in 1997 totalled $4.9 million, including $3.2
million paid by Milestone to BSIA and $1.5 million paid by Milestone to
Westside, as compared to a total of $529,000 for 1996. The Company expects that
for the foreseeable future Milestone will continue to pay a comparable
percentage of its revenues as sub-advisory expense. Compensation and related
expenses in 1997 were $1.4 million, including earn-out payments of $637,500 paid
by Milestone to Messrs. Lipnick and Mintz upon the achievement of gross revenue
targets specified in the Milestone Agreement, as compared to compensation and
related expenses of $297,000 in 1996. The earn-out payments to Messrs. Lipnick
and Mintz are a one-time, non-recurring payment. See "Certain Relationships and
Related Party Transactions." Other operating expenses were $900,000 in 1997, as
compared to $228,000 in 1996.
Net interest income was not significant for either the year ended December
31, 1997 or the period ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its cash requirements primarily through
cash generated by its operations, bank borrowings, and the issuance of equity
and debt securities in private placement transactions. See "Certain
Relationships and Related Party Transactions."
The Company intends to use its cash flow from operations for the
foreseeable future to support marketing activities and product development, to
repay debt, including interest payments on outstanding debt, and for other
working capital needs. To a lesser extent, the Company may use cash flow from
operations for its acquisition activities, although the Company does not expect
that such amounts alone will be sufficient to support its planned level of
acquisition activities. The Company's principal uses of cash have been to make
acquisitions of the Affiliated Firms and to support the Company's operating
activities. The Company does not expect to make commitments for material capital
expenditures in the foreseeable future.
As of March 31, 1998, the Company had cash and cash equivalents of $6.5
million, compared to $12.2 million at the end of 1997 and $3.2 million at the
end of 1996. As of March 31, 1998 and December 31, 1997, the Company had $4.7
million and $3.9 million, respectively, primarily invested in the Cash
Alternative Fund, L.P., a corporate cash management investment vehicle in which
the Company and its affiliates hold a limited partnership interest of
approximately 35%.
Net cash used in operating activities was $1.7 million and $2.7 million for
the periods ended December 31, 1997 and 1996, respectively, and $237,000 and
$358,000 for the three months ended March 31,
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1998 and 1997, respectively. Net cash used in investing activities was $1.1
million and $877,000 for the periods ended December 31, 1997 and 1996,
respectively, and $15.9 million and $717,000 for the three months ended March
31, 1998 and 1997, respectively. Such amounts were used primarily to acquire
preferred interests in Trust Advisors in 1996, Silverado in 1997 and Bricoleur
in February 1998. Net cash provided by (used in) financing activities was $11.8
million and $6.8 million for the periods ended December 31, 1997 and 1996,
respectively, and $10.5 million and ($31,000) for the three months ended March
31, 1998 and 1997, respectively. The issuance of the Series B Preferred Stock
was the primary source of the net cash provided by financing activities in 1997.
Net cash provided by financing activities in 1996 primarily consisted of the
proceeds from the issuance of capital stock including the Series A Preferred
Stock and shares of Common Stock sold to private investors. Borrowings under the
Credit Agreement were the principal source of the net cash provided by operating
activities in the three months ended March 31, 1998.
In February 1998, the Company completed the Bricoleur Acquisition, which
required approximately $17.7 million in cash (including transaction costs). In
April 1998, the Company completed the JMG-Pacific Acquisition, which required
approximately $30.0 million in cash (including transaction costs). The Company
expects to complete the MET Acquisition within 30 days after the consummation of
the Offering. The consummation of the MET Acquisition is expected to require
approximately $18.4 million in cash (including transaction costs). See
"-- Recent and Pending Acquisitions."
The Company obtained the financing for the cash portions of the purchase
prices for the Bricoleur Acquisition and the JMG-Pacific Acquisition pursuant to
(i) $30.0 million in borrowings under the Credit Agreement (and $10.0 million of
such borrowings as of March 31, 1998), (ii) $10.0 million in proceeds from the
issuance of the Series B Preferred Stock, and (iii) $5.0 million in borrowings
pursuant to the Citco Loan (clauses (i) -- (iii) collectively, the "Recent
Financing"). The Company expects to obtain the cash portion of the purchase
price for the MET Acquisition from the proceeds of the Offering.
In February 1998, the Company entered into the Credit Agreement with the
Lending Bank. The Credit Agreement permits the Company to borrow an aggregate of
$30 million in term loans with five-year maturities in two facilities: $10
million under Facility A and $20 million under Facility B. The Facility B term
loans are guaranteed by AJG Co. Interest on the term loans is calculated, at the
option of the Company, at LIBOR or the Lending Bank's Federal Funds rate, plus a
margin of 1.25% for the Facility A term loans and 0.50% for the Facility B term
loans.
The Facility A and Facility B term loans can be prepaid without penalty at
any time. Principal payments on the term loans, if not otherwise made from the
proceeds of the Offering, are required in aggregate annual amounts of $5.0
million during the first two years of the loans to repay the Facility A term
loans and $6.7 million during the third, fourth and fifth years of the loans to
repay the Facility B term loans.
The Company has utilized borrowings under the Credit Agreement to finance
the cash portion of the Bricoleur Acquisition and a part of the cash portion of
the purchase for the JMG-Pacific Acquisition. Investments in Bricoleur and
JMG-Pacific in the aggregate represent in excess of 68% of the Company's assets
at March 31, 1998 on a pro forma basis. The Credit Agreement contains usual and
customary covenants, including financial covenants. As of the date of this
Prospectus, the Company is in compliance with each of the covenants, including
the financial covenants. The Company's ability to borrow under the Credit
Agreement is conditioned upon its compliance with the requirements of the Credit
Agreement, and any non-compliance with those requirements could give rise to a
default entitling the lenders to accelerate all outstanding borrowings under the
Credit Agreement.
The Company intends to repay all indebtedness to be outstanding under the
Credit Agreement with a portion of the net proceeds of the Offering. As a
result, upon completion of the Offering and the application of the proceeds
therefrom, the Company will not have any borrowing capacity available under the
Credit Agreement. See "Use of Proceeds." Following the consummation of the
Offering, the Company expects to have additional borrowing capacity under the
New Credit Facility.
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On May 8, 1998, the Company received a commitment letter from the Lending
Bank for the New Credit Facility, subject to consummation of the Offering and
customary and usual conditions precedent, which will have terms substantially
similar to those contained in the Credit Agreement.
The Company is currently negotiating definitive documentation for the New
Credit Facility. The following summary of the principal terms of the New Credit
Facility does not purport to be complete and is qualified in its entirety by
reference to the provisions of a definitive credit agreement and other related
documents that the Company expects to be finalized prior to completion of the
Offering. The New Credit Facility will consist of a $50 million senior revolving
credit facility, which amount may be increased at the option of the Company by
up to an additional $50 million, provided that no default under such New Credit
Facility has occurred, with a five year maturity date. The New Credit Facility
will be available on a revolving basis for up to three years, after which time
outstanding borrowings under the facility will automatically convert to a two
year term loan facility. Interest on the revolving credit borrowings will be
calculated, at the option of the Company, at LIBOR or the Base Rate (the greater
of the Lending Bank's reference rate or the Federal Funds Rate plus 0.50%), plus
in either case the applicable margin, which applicable margin initially will be
at least 2.0% per annum for borrowings at LIBOR and 0.75% per annum for
borrowings at the Base Rate and will fluctuate depending upon the financial
performance of the Company. Advances made at the Base Rate may be prepaid at any
time on one business day's notice. Advances made based on LIBOR require three
business days' notice for prepayment. Commencing in year four, the Company will
be required, under certain circumstances, to make mandatory prepayments of the
outstanding indebtedness under the New Credit Facility. The Company will pay a
commitment fee which initially will be at least 0.45% per annum on the unused
portion of the New Credit Facility. Such fee changes depending on the financial
performance of the Company.
The Company's borrowings under the New Credit Facility may be used to
acquire preferred interests in Alternative Managers and for general corporate
purposes. The Company's borrowings will be collateralized by the pledge of all
of the assets of the Company and its material subsidiaries, including their
interests in the Affiliated Firms. The New Credit Facility will contain a number
of covenants similar to those contained in the Credit Agreement. The New Credit
Facility also will require the Company to comply with certain financial
covenants which are expected to be similar to those contained in the Credit
Agreement and which could limit the Company's ability to pay dividends and other
distributions to stockholders. The Company's ability to borrow under the New
Credit Facility will be 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, in December 1997 the Company issued to AJG
Co. 100,000 shares of Series B Preferred Stock (convertible into 1,000,000
shares of Common Stock) for aggregate cash consideration of $10 million. See
"Certain Relationships and Related Party Transactions." The proceeds from the
sale of the Series B Preferred Stock were used to finance a part of the cash
portion of the purchase price for the Bricoleur Acquisition. The Series B
Preferred Stock will automatically convert into shares of Common Stock upon the
consummation of the Offering.
On March 23, 1998, the Company entered into the Citco Loan with Citco
Banking Corporation N.V. to finance $5 million of the cash portion of the
purchase price for the JMG-Pacific Acquisition. The Citco Loan bears interest at
2% over the prime rate as quoted in The Wall Street Journal and matures on June
1, 1998. In connection with the Citco Loan, the Company issued 17,500 warrants
to an affiliate of the Citco Group, with an initial exercise price of $10.00 per
share. The Company intends to repay the Citco Loan with a portion of the net
proceeds of the Offering. See "Use of Proceeds."
In order to maintain its planned level of acquisition activities in the
future, the Company expects it will be necessary to incur, from time to time,
additional long-term bank debt, including the New Credit Facility, and/or issue
equity or debt securities. There can be no assurance that such additional
financing will be available on terms acceptable to the Company. See "Risk
Factors -- Use of Debt to Finance Acquisitions Could Adversely Affect the
Company."
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YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and therefore cannot
recognize the year 2000. These date code fields will need to accept four digit
entries in order to distinguish 21(st) century dates from 20(th) century dates.
As a result, computer systems or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Company currently is
evaluating its information technology infrastructure and that of the Affiliated
Firms and is working with software vendors to prepare the Company and the
Affiliated Firms for "Year 2000" compliance. The Company does not expect that
the cost to modify information technology infrastructure to be Year 2000
compliant will be material to the financial condition or results of operations
of the Company or the Affiliated Firms nor does it anticipate any material
disruption in the operations of the Company or the Affiliated Firms as a result
of any failure by the Company or the Affiliated Firms to be Year 2000 compliant.
Nonetheless, there can be no assurance in this regard until such systems are
operational in the year 2000.
The Company's Year 2000 issues relate not only to its own systems and those
of the Affiliated Firms but also to the systems of service providers to the
Company and the Affiliated Firms. The failure to recognize the year 2000 could
have a negative impact on, among other things, the handling of securities
trading, the pricing of securities and account services. While in certain
instances service providers to the Company and the Affiliated Firms have advised
the Company or the Affiliated Firms that they believe Year 2000 compliance has
been achieved, in other instances such service providers believe they have not
yet achieved such compliance. The failure of such service providers to
successfully and timely achieve Year 2000 compliance could adversely affect the
business of the Company and/or the Affiliated Firms.
INTEREST RATE SENSITIVITY
The Company's revenues consist almost entirely of distributions of the
Preferred Revenue Shares from the Affiliated Firms. Accordingly, a high
percentage of the Company's revenues are dependent on fees or profit allocations
which are based on a combination of the investment performance of the Affiliated
Firms and the values of assets managed by them. Investment performance and
thereby asset values are often affected by changes in the broader financial
markets which are, in part, and sometimes significantly, 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
the investment performance of the Affiliated Firms. Any decline in the financial
markets or a lack of sustained growth may result in a decline in performance by
the Affiliated Firms and may adversely affect assets under management and/or
fees at the Affiliated Firm level, which would reduce the Preferred Revenue
Shares. Increases in interest rates, however, would have the effect of making
future debt financings by the Company more expensive. See "Risk Factors -- The
Performance of the Company and the Affiliated Firms May Be Adversely Affected by
Economic and Market Conditions" and "-- Use of Debt to Finance Acquisitions
Could Adversely Affect the Company."
ECONOMIC AND MARKET CONDITIONS
The financial markets and the investment management industry in general
have experienced record performance and record growth in recent years. The
financial markets and businesses operating in the securities industry, however,
are highly volatile and are directly affected by, among other factors, domestic
and foreign economic conditions and general trends in business and finance, all
of which are beyond the control of the Company. No assurance can be given 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 Affiliated Firms and may adversely affect assets
under management and/or fees or profit allocations at the Affiliated Firm level,
which would reduce the Preferred Revenue Shares.
INFLATION
The Company does not believe that inflation or changing prices have had a
material impact on its results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of Asset Alliance are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Bruce H. Lipnick.......................... 51 President, Chief Executive Officer and
Chairman of the Board
Arnold L. Mintz........................... 51 Executive Vice President, Chief Operating
Officer, Secretary and Director
Jeffrey J. Ervine......................... 32 Senior Vice President and Chief Financial
Officer
David R. Long............................. 46 Senior Vice President, Acquisitions and
Director(1)
Jeffrey M. Moses.......................... 38 Senior Vice President and General Counsel
Mark P. Strauch........................... 43 Senior Vice President, Treasurer and
Director(1)
Joseph Lagnado............................ 47 Controller
Jefferson F. Allen........................ 53 Director(2)
Harvey Silverman.......................... 57 Director(2)
</TABLE>
- ---------------
(1) Messrs. Long and Strauch are part-time employees of the Company.
(2) To become a Director upon and subject to consummation of the Offering.
BRUCE H. LIPNICK, the founder of Asset Alliance, has served as the Chairman
of the Board of Directors, President and Chief Executive Officer of the Company
since its inception in 1996. Since 1982, Mr. Lipnick has served as President,
Chief Executive Officer and Director of Wharton Management Group Inc., a
registered investment adviser ("Wharton Management"). In addition, since 1982,
Mr. Lipnick has served as chief executive officer and general partner of several
investment entities. Mr. Lipnick currently serves as the President and a
Director of Milestone Fund Manager Inc. (the general partner of Milestone) and
the President and Chief Executive Officer of Milestone Investment Group Inc.
(the limited partner of Milestone). He also serves as President and Director of
Manager Advisory Group Inc., a broker-dealer registered with the NASD, which is
unaffiliated with the Company.
ARNOLD L. MINTZ, the co-founder of Asset Alliance, has served as Executive
Vice President, Chief Operating Officer, Secretary and Director of the Company
since its inception in 1996. Since 1982, Mr. Mintz has served as Executive Vice
President, Chief Operating Officer, Secretary and Director of Wharton
Management. In addition, since 1982, Mr. Mintz has served as chief operating
officer of several investment entities. He currently serves as the Executive
Vice President, Chief Operating Officer and Secretary of Milestone Investment
Group Inc. and Milestone Fund Manager Inc. Mr. Mintz also serves as Executive
Vice President, Secretary, Director and a registered principal of Manager
Advisory Group Inc. and Asset Alliance Investment Services Inc., a wholly-owned
subsidiary of the Company, which is a broker-dealer with NASD registration
pending.
JEFFREY J. ERVINE joined Asset Alliance as Senior Vice President and
Treasurer in March 1998. In May 1998, Mr. Ervine became Chief Financial Officer
of the Company. From 1997 until joining Asset Alliance, Mr. Ervine was an
associate in the Financial Institutions Group at Bear, Stearns & Co. Inc., where
he began working after he received his Master of Business Administration with a
concentration in finance. From 1992 to 1995, Mr. Ervine worked for Deloitte &
Touche LLP as a manager in the LBO Coverage Group, where he specialized in
buyside advisory due diligence. Mr. Ervine is a Certified Public Accountant.
DAVID R. LONG has served as Senior Vice President, Acquisitions and
Director of Asset Alliance since July 1996. Since 1996, Mr. Long has served, and
is currently serving, as President of AJG, a wholly-owned subsidiary of AJG Co.,
where he has served in various executive capacities since 1981. Since 1989, Mr.
Long also has served as Vice President and Chief Investment Officer of AJG Co.,
having previously served as its
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Treasurer. In addition, Mr. Long serves as a Director of Fasciano Fund Mutual
Fund Company, an open-end mutual fund company.
JEFFREY M. MOSES joined Asset Alliance as Senior Vice President and General
Counsel in February 1998. From 1991 through 1996, Mr. Moses was Executive Vice
President of Systematic Financial Management, L.P., an investment advisory firm.
Prior to that time, Mr. Moses was an attorney at Baer Marks & Upham LLP,
focusing on mergers and acquisitions. Mr. Moses also is a Chartered Financial
Analyst.
MARK P. STRAUCH has served as Senior Vice President and Director of Asset
Alliance since July 1996. Mr. Strauch also served as Chief Financial Officer of
Asset Alliance from July 1996 to May 1998 and now serves as Treasurer. Since
March 1997, Mr. Strauch has served, and is currently serving, as Executive Vice
President of AJG and he has served as Treasurer of AJG Co. since 1989, where he
also is a member of its investment committee.
JOSEPH LAGNADO has served as the Controller of Asset Alliance since its
inception in 1996. From 1986 to the present, Mr. Lagnado also has served as
Chief Financial Officer and Compliance Director of Wharton Management Group Inc.
and its affiliated entities. He has been the Chief Financial Officer for Manager
Advisory Group Inc. since 1987 and serves as Chief Financial Officer for several
of the funds operated by Milestone, Trust Advisors and Silverado. Mr. Lagnado is
a Certified Public Accountant and an NASD registered financial and operations
principal.
JEFFERSON F. ALLEN has served as the President and Director of Tosco
Corporation ("Tosco"), the largest independent refiner and marketer of petroleum
products in the United States, since May 1997 and has served as Chief Financial
Officer of Tosco since June 1990. From June 1990 until May 1997, Mr. Allen was
Executive Vice President of Tosco and served as Treasurer from June 1990 until
October 1995.
HARVEY SILVERMAN is Senior Managing Director of Spear, Leeds & Kellogg
("Spear, Leeds"), the largest specialist on both the New York and American Stock
Exchanges, and has held various positions, including senior management
positions, since joining Spear, Leeds in 1963. Mr. Silverman is the Vice
Chairman and Director of the Options Clearing Corporation and an official of the
American Stock Exchange. Mr. Silverman also is a Director of Unidigital Inc. and
Worldwide Entertainment & Sports Corp.
The Company intends to appoint one additional outside Director as soon as
practicable following the consummation of the Offering.
The Company's Board of Directors will, upon consummation of the Offering,
consist of six directors. The directors will be divided as evenly as possible
into three classes, denominated Class I, Class II and Class III, with the terms
of office of each class expiring at the 1999, 2000 and 2001 annual meeting of
stockholders, respectively. At each annual meeting of the stockholders following
such initial classification and election, directors elected to succeed those
directors whose terms expire will be elected for a term to expire at the third
succeeding annual meeting of the stockholders after their election. See
"Description of Capital Stock -- Anti-Takeover Effects of Certain Provisions of
the Certificate and By-Laws and of Delaware Law -- Classified Board of
Directors." The directors in each class are as follows: Class I -- Messrs. Long
and Strauch, Class II -- Messrs. Mintz and Silverman and Class III -- Messrs.
Lipnick and Allen. Mr. Strauch does not intend to be a candidate for re-election
to the Board of Directors at the 1999 annual meeting of stockholders. All
officers are appointed by and serve at the direction of the Board of Directors.
There are no family relationships among any of the officers and directors.
The Board of Directors will conduct its regular meetings on a quarterly
basis and will schedule special meetings as necessary.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the consummation of the Offering, the Board of Directors will
establish an audit committee (the "Audit Committee"), which will consist of
Messrs. Allen and Silverman, a compensation committee (the "Compensation
Committee"), which will consist of Messrs. Mintz, Allen and Silverman, and an
executive committee (the "Executive Committee"), which will consist of Messrs.
Lipnick, Mintz and Long.
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The Audit Committee will review the scope and approach of the annual audit,
the annual financial statements of the Company and the auditors' report thereon
and the auditors' comments relative to the adequacy of the Company's system of
internal controls and accounting systems. The Audit Committee will also
recommend to the Board of Directors the appointment of independent public
accountants for the following year. The Audit Committee will consist of at least
two members, the majority of whom will be independent directors.
The Compensation Committee will review management compensation levels and
provide recommendations to the Board of Directors regarding salaries and other
compensation for the Company's executive officers, including bonuses and
incentive programs, and will administer the 1996 Plan. See "-- Compensation
Committee Interlocks and Insider Participation."
The Executive Committee will have the power and authority of the Board of
Directors to manage the affairs of the Company between meetings. The Executive
Committee will also regularly review significant corporate matters and recommend
action as appropriate to the Board of Directors. However, the Executive
Committee may not (i) amend the Certificate or the By-Laws of the Company, (ii)
adopt an agreement of merger or consolidation, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Company's property and assets, (iv) recommend to the stockholders a dissolution
of the Company or revoke a dissolution, (v) elect a director or (vi) make a
distribution or authorize the issuance of stock.
BOARD OF ADVISORS
The Company's management has established an advisory committee (the "Board
of Advisors") with which management consults on possible acquisition
opportunities and on other matters relating to the business of the Company. The
function of the Board of Advisors is to offer broad guidance to the officers and
the Board of Directors of the Company on matters of policy and to provide
specific assistance and advice regarding potential acquisitions. Management
believes that the members of the Board of Advisors, because of their experience
and diverse interests and activities, will be a source of opportunities for the
Company and the Affiliated Firms. The Company has no obligation to accept or
take action with respect to any recommendation of the Board of Advisors.
The Board of Advisors meets quarterly, and the Company regularly calls on
members of the Board of Advisors from time to time as they are needed for advice
and consultation. Any compensation to members of the Board of Advisors is paid
by the Company and may include the issuance of options to purchase shares of
Common Stock or the issuance of warrants exercisable for Common Stock. The Board
of Directors has granted each member of the Board of Advisors who is
unaffiliated with the Company ten-year options to purchase shares of Common
Stock. See "-- Non-Plan Stock Option Grants."
Unaffiliated Members
The following individuals have been appointed by the Board of Directors to
serve as unaffiliated members of the Board of Advisors:
ANDREW W. GITLIN was appointed to the Board of Advisors in November 1996.
Mr. Gitlin is President of AIG International Asset Management, Inc. ("AIGIAM"),
a majority-owned subsidiary of American International Group, Inc., one of the
largest financial service companies in the world. At AIGIAM, Mr. Gitlin is
responsible for a business that currently manages investment products for third
parties and also is responsible for the allocation of capital to a variety of
external money managers. Before joining AIGIAM, Mr. Gitlin was a director of
Chase Manhattan Capital Finance Corp. and a vice president and founder of the
CHASE managed funds, a multi-adviser managed fund business.
BARRY GOODMAN was appointed to the Board of Advisors in March 1997. Mr.
Goodman is Executive Vice President, Director of Trading and Co-Director of
Research of the Millburn Ridgefield Corporation ("Millburn"), a commodity
trading advisory firm, with assets under management of approximately $1.5
billion. Mr. Goodman is responsible for the development and implementation of
trading and investment programs for Millburn.
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HARRY W. RHULEN was appointed to the Board of Advisors in March 1998. Mr.
Rhulen is President, Chief Executive Officer and Chairman of the Board of
Frontier Insurance Group, Inc., a specialty insurance company listed on the New
York Stock Exchange.
ERMANNO UNTERNAHRER was appointed to the Board of Advisors in November
1996. Mr. Unternahrer is the President of Citco Fund Advisors LLC ("Citco Fund
Advisors"), a New York based consulting firm specializing in the selection and
tracking of money managers. Citco Fund Advisors is an affiliate of the Citco
Group, a global independent fund administrator and financial services
organization.
Affiliated Members
The Board of Directors also has appointed Principals from each of the
Affiliated Firms to serve as affiliated members of the Board of Advisors. In
such capacity, these Principals will advise the Board of Directors on various
matters pertaining to the Company and the Affiliated Firms. The Principals will
not receive any compensation for their service to the Company as members of the
Board of Advisors. See "Business -- The Affiliated Firms."
STRATEGIC STOCKHOLDERS
Since inception, Asset Alliance has benefited from a core group of founding
strategic stockholders, including AJG and the Citco Group.
AJG, in addition to providing equity capital to the Company, has assisted
the Company with financial planning and analysis and with negotiating and
structuring several of its acquisitions. AJG, through the services of David R.
Long and Mark P. Strauch, will continue to provide the Company with such
services on an arm's-length basis for a minimum of one year from the date of the
Offering. See "-- Employment Agreements."
The Citco Group has assisted the Company by providing the initial capital
for, and assisting in the structuring of, various investment vehicles managed by
the Affiliated Firms.
Both AJG and the Citco Group also have had representatives serving on the
Company's Board of Directors and/or Board of Advisors, and have assisted the
Company in its marketing and distribution efforts.
The Company has been advised that certain existing stockholders (including
AJG and Frontier Insurance Group, Inc.) and certain of their affiliates, which
in the aggregate beneficially own 33.8% of the Common Stock prior to the
Offering, intend to purchase in the Offering, at the initial public offering
price, shares of Common Stock having a total purchase price of $5.25 million.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company by the Company's Chief Executive
Officer and its other most highly compensated executive officer whose total
salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) COMPENSATION($)(1) OPTIONS(#)
- --------------------------- ------------ ------------------ ------------
<S> <C> <C> <C>
Bruce H. Lipnick, Chairman of the Board,
President and Chief Executive Officer......... $200,000 $22,963 20,000
Arnold L. Mintz, Executive Vice President, Chief
Operating Officer and Secretary............... 200,000 14,143 20,000
</TABLE>
- ---------------
(1) Includes: (i) the dollar value of insurance premiums paid by the Company
with respect to long-term disability insurance policies in the amount of
$8,166 on behalf of Mr. Lipnick and $4,262 on behalf of
66
<PAGE> 68
Mr. Mintz; and (ii) the amount paid by the Company with respect to
automobile lease expenses in the amount of $14,797 on behalf of Mr. Lipnick
and $9,881 on behalf of Mr. Mintz. Excludes a one-time aggregate earn-out
payment of $637,500 made to Messrs. Lipnick and Mintz pursuant to the terms
of the Milestone Agreement. See "Certain Relationships and Related Party
Transactions."
STOCK OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options during the fiscal year ended December 31, 1997 by the Company to
the Named Executive Officers. As of the date hereof, the Company has not granted
any stock appreciation rights.
OPTIONS GRANTED IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED(#) FISCAL 1997 ($/SHARE)(1) DATE(2) 5%($) 10%($)
- ---- ---------- ------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bruce H. Lipnick.......... 20,000 20% $7.50 12/05/07 $ 94,400 $239,000
Arnold L. Mintz........... 20,000 20% 7.50 12/05/07 94,400 239,000
</TABLE>
- ---------------
(1) The exercise price was fixed at the date of grant and represented the fair
market value per share of Common Stock on such date.
(2) All options were granted on December 5, 1997 and vest at a rate of one-third
per year, with one-third becoming exercisable on each of December 5, 1998,
December 5, 1999 and December 5, 2000.
(3) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect the Company's estimates or projections of future Common Stock
prices. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the future
performance of the Common Stock, the option holders' continued employment
through the option period, and the date on which the options are exercised.
The following table sets forth information concerning the number and value
of securities underlying unexercised options held at December 31, 1997 by each
of the Named Executive Officers. During 1997, no stock options were exercised by
any of the Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Bruce H. Lipnick..................... 8,333 36,667 $76,200 $242,300
Arnold L. Mintz...................... 8,333 36,667 76,200 242,300
</TABLE>
- ---------------
(1) Value for "in-the-money" options represents the positive spread between the
respective exercise prices of outstanding options and an assumed initial
public offering price of $12.00 per share.
67
<PAGE> 69
EMPLOYMENT AGREEMENTS
Bruce H. Lipnick and Arnold L. Mintz (each, an "Employee") are each party
to an amended and restated employment agreement with the Company (collectively,
the "Employment Agreements"), pursuant to which each Employee is entitled to an
annual base salary of $495,000 and $395,000, respectively. Each Employee also is
entitled to an additional incentive bonus payment of a stated amount based upon
the Company achieving a certain EBITDA per share (the "Incentive Bonus"), as
determined each year by the Board of Directors and the Company's independent
accountants, and may receive a discretionary annual bonus as determined solely
by the Board of Directors. The Employment Agreements replaced each Employee's
initial employment agreement dated July 8, 1996. In consideration of entering
into the Employment Agreements and foregoing the right to receive certain cash
bonus payments, the Company granted options to purchase 50,000 shares of Common
Stock to each Employee.
The Employment Agreements became effective on January 1, 1998, for a term
of five years expiring on January 1, 2003, and automatically renew for
successive one-year periods unless terminated earlier upon 180 days' prior
written notice by the Company or Employee. The Company has the right to
terminate each Employee for cause and each Employee has the right to resign for
good reason, including a change of control of the Company, as such terms are
defined in the Employment Agreements.
In the event that either Employee is terminated without cause or resigns
for good reason, the Company must continue to pay the terminated or resigning
Employee the full amount of his then current base salary plus all other benefits
to which he is entitled under the Employment Agreement. In addition, the Company
must pay, in a single lump sum within five days after the date of such
termination or resignation, three times the average of the Incentive Bonus paid
or payable to such Employee in the last two years. If such resignation is the
result of a change of control, then the Company must pay the entire amount
payable to the Employee (as described above) in a single lump sum within five
days after the date of resignation. In addition, the Employment Agreements
provide for a "gross-up" payment with respect to any excise tax imposed on an
Employee under Section 4999 of the Code with respect to the payments under his
Employment Agreement.
The Employment Agreements provide that during the term of such agreements,
each Employee shall devote substantially all of his working time to the business
of the Company. In addition, each Employee has agreed that for the term of his
Employment Agreement and for two years thereafter, he shall not engage in
competing ventures, subject to exception for certain existing activities, and
shall not interfere with the customers or solicit any employee of the Company or
any of its affiliates.
The Company also has entered into employment agreements with the following
executive officers who were not Named Executive Officers with respect to the
fiscal year ended 1997 but who the Company anticipates will be named executive
officers in fiscal 1998.
Jeffrey J. Ervine is a party to an employment agreement with the Company,
pursuant to which he is entitled to an annual base salary of $175,000, and may
receive, at the discretion of the Board of Directors, a discretionary annual
bonus of up to 50% of his base salary. In addition, the Company has granted Mr.
Ervine options to purchase 150,000 shares of Common Stock, of which options to
purchase 50,000 shares vested on March 12, 1998, with the remainder vesting
annually thereafter pursuant to a six year vesting schedule. Pursuant to the
terms of the employment agreement, the Company has agreed to employ Mr. Ervine
as Senior Vice President and Treasurer of the Company until such time as the
Board of Directors shall appoint him Chief Financial Officer, which shall occur
no later than six months after the consummation of the Offering.
Mr. Ervine's employment agreement became effective on March 12, 1998, for a
term of five years expiring on January 1, 2003. The Company has the right to
terminate Mr. Ervine for cause and Mr. Ervine has the right to resign for good
reason including a change of control of the Company, as such terms are defined
in the employment agreement. In the event that Mr. Ervine is terminated without
cause or resigns for good reason, the Company must continue to pay Mr. Ervine
the full amount of his then current base salary for three years, if such
termination or resignation occurs on or before March 12, 2000, or for two years,
if such termination or resignation occurs after such date. In addition, all of
Mr. Ervine's options shall vest and become immediately exercisable as of the
date of such termination or resignation.
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<PAGE> 70
Mr. Ervine also is subject to the same non-competition and non-intervention
restrictions as Messrs. Lipnick and Mintz, which are described above.
Mark P. Strauch and David R. Long also are parties to amended and restated
employment agreements (collectively, the "Strauch and Long Agreements") with the
Company, pursuant to which Messrs. Strauch and Long are entitled to annual base
salaries of $95,000 and $105,000, respectively, and may be granted a bonus at
the discretion of the Board of Directors. Messrs. Strauch and Long may be
granted options under the 1996 Plan, but are not entitled to participate in the
Company's employee benefit plans. The Strauch and Long Agreements replaced
initial employment agreements of each of Messrs. Strauch and Long dated July 8,
1996. In consideration of entering into the Strauch and Long Agreements and
foregoing the five-year employment term of their prior agreements, the Company
granted options to purchase 20,000 shares of Common Stock to each of Messrs.
Strauch and Long.
The Strauch and Long Agreements require Messrs. Strauch and Long to devote
the amount of time necessary to fulfill their duties to the Company in a
faithful and diligent manner, subject to their responsibilities to AJG. The
Strauch and Long Agreements became effective on February 1, 1998 for a one year
term expiring February 1, 1999 and are renewable at the option of the Company
and the employee upon 30 days' notice under the same terms. In the event that
either of Messrs. Strauch or Long is terminated without cause (as defined in the
Strauch and Long Agreements), the Company must continue to pay the terminated
employee's base salary through the expiration of the term of his agreement.
Each of Messrs. Strauch and Long has agreed that for the term of his
agreement and for six months thereafter, he shall not engage in competing
ventures, subject to exception for the performance of his duties to AJG Co., and
shall not interfere with the customers or solicit any employee of the Company or
any of its affiliates. AJG Co., which employs both Messrs. Strauch and Long on a
full-time basis, has been apprised of such agreements and has consented to the
terms and conditions contained therein. See "Certain Relationships and Related
Party Transactions."
In February 1998, Jeffrey M. Moses was retained by the Company as Senior
Vice President and General Counsel. Mr. Moses receives an annual base salary of
$150,000 and is entitled to an annual bonus in an amount to be determined at the
discretion of the Board of Directors. Mr. Moses also was granted options under
the 1996 Plan to purchase 120,000 shares of Common Stock of the Company, of
which options to purchase 15,000 shares vest on August 3, 1998, with the
remainder vesting in equal annual installments over a six-year period.
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") are each compensated $500 for each meeting of the
Board of Directors, including committee meetings. Independent Directors also may
be entitled to receive options to purchase shares of Common Stock. The Board of
Directors has approved the grant of options to purchase 10,000 shares of Common
Stock to each of Messrs. Allen and Silverman. See "-- Compensation, Benefit and
Retirement Plans -- Non-Plan Stock Option Grants."
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 1996 Plan and may also grant options
to various individuals, including members of the Board of Advisors and certain
Principals, pursuant to non-plan stock option agreements. Pursuant to the 1996
Plan and certain stock option agreements, giving effect to the Offering, the
Company will have reserved 1,556,594 shares, or approximately 8.4% of the
outstanding Common Stock after giving effect to the Offering for issuance under
the 1996 Plan and under all other stock option agreements, and will have awarded
options to purchase (i) up to 646,250 shares of Common Stock, or approximately
3.7% of the outstanding Common Stock after giving effect to the Offering, to
members of senior
69
<PAGE> 71
management and directors and (ii) up to 115,344 shares of Common Stock, or
approximately 0.7% of the outstanding Common Stock after giving effect to the
Offering, to Principals of the Affiliated Firms or consultants and advisors of
the Company. The following is a brief summary of the 1996 Plan and certain non-
plan stock option grants made or to be made in the future by the Company.
The 1996 Stock Option Plan
On December 18, 1996, the Board of Directors adopted, and the stockholders
of the Company subsequently approved, the 1996 Plan, which was amended on
January 23, 1998. Under the 1996 Plan, 1,400,000 shares of Common Stock are
authorized and reserved for issuance.
The 1996 Plan permits (i) the grant of options to purchase shares of Common
Stock intended to qualify as incentive stock options ("Incentive Options") under
Section 422 of the Code to employees of the Company or its subsidiaries or (ii)
the grant of options that do not so qualify ("Non-Qualified Options") to
employees, directors or consultants of the Company or its subsidiaries. The 1996
Plan was designed and intended to encourage ownership of the Common Stock by
employees, directors, consultants and advisors of the Company and the Affiliated
Firms, to induce qualified personnel to enter and remain in the employ of the
Company or the Affiliated Firms and otherwise to provide additional incentive
for optionees to promote the success of the Company's business. As of April 30,
1998, Non-Qualified Options to purchase 628,000 shares of Common Stock had been
awarded under the 1996 Plan and no Incentive Options had been awarded. The Plan
will be administered by the Board or a committee thereof. The exercise price of
an Incentive Option shall not be less than the fair market value of a share of
Common Stock on the date of grant and the exercise price of a Non-Qualified
Option shall not be less than 85% of the fair market value of a share of Common
Stock on the date of grant. Options shall vest and become exercisable as set
forth in the applicable option agreement. All options shall vest and become
exercisable in full upon a "hostile change in control" as defined in the 1996
Plan or the applicable stock option agreement.
The preceding summary description is qualified in its entirety by the 1996
Plan, a copy of which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Non-Plan Stock Option Grants
The Company may grant ten-year options to purchase shares of Common Stock
to non-affiliated members of the Board of Advisors, independent members of the
Board of Directors and certain other advisors or consultants. Such grants are
authorized by the Board of Directors and made pursuant to stock option
agreements between the Company and each individual receiving stock options, but
are not granted pursuant to the 1996 Plan. Upon any such grant, the Board of
Directors reserves from authorized but unissued shares of the Common Stock the
number of shares underlying the grant to each such individual. As of April 30,
1998, the Company has granted options to purchase 80,000 shares of Common Stock
to non-affiliated members of the Board of Advisors, options to purchase 20,000
shares of Common Stock to independent members of the Board of Directors and
options to purchase 20,000 shares of Common Stock to consultants to the Company.
See "-- Board of Advisors."
In addition, the Company is required to grant options to purchase shares of
Common Stock to certain of the Principals pursuant to the terms of the purchase
agreements between the Company and the Affiliated Firms. The grant of such
options to Principals generally will be based upon the achievement of stated
future revenue targets by the Affiliated Firm, as set forth in the applicable
purchase agreement. See "Business -- Innovative Structure." The number of
options to be granted will vary based on the amount by which the Affiliated Firm
exceeds its revenue target. Any such grant requires the Principals to enter into
a stock option agreement with the Company in a form substantially similar to the
stock option agreement appended to the related purchase agreement. Messrs.
Lipnick and Mintz also are entitled to receive options as described above under
the terms of the Milestone Agreement pursuant to which the Company acquired from
them their respective interests in MIG. As a result, as of April 30, 1998, the
Company has granted options to purchase an aggregate of 21,250 shares of Common
Stock to Messrs. Lipnick and Mintz pursuant to the Milestone Agreement. See
"Certain Relationships and Related Party Transactions." In addition, the
Principals of Trust
70
<PAGE> 72
Advisors are entitled to receive options to purchase 15,344 shares of Common
Stock based upon Trust Advisors' revenues in 1997. Pursuant to the terms of each
purchase agreement, the Company has reserved from authorized but unissued shares
of Common Stock such number of shares as the Company anticipates may be
necessary for the issuance of options to the Principals.
Pension and Profit Sharing Plan
The Company currently maintains the Asset Alliance 401(k) Retirement Plan
(the "Retirement Plan"). Under the Retirement Plan, qualifying employees of the
Company are able to accumulate savings by means of a salary reduction. Any
contributions by the Company under the Retirement Plan are determined annually
by the Board of Directors. Certain of the Affiliated Firms maintain their own
401(k) and profit sharing plans.
KEY EXECUTIVE LIFE INSURANCE
Asset Alliance Holding Corp., a holding company which is a wholly-owned
subsidiary of Asset Alliance, currently maintains and is the sole beneficiary of
a $1,000,000 key man life insurance policy on each of Messrs. Lipnick and Mintz.
In addition, certain of the Affiliated Firms maintain insurance policies on the
lives of the Principals of such Affiliated Firms. Asset Alliance Holding Corp.
also currently maintains and is the sole beneficiary of additional key man life
insurance policies on the lives of certain other members of management of the
Affiliated Firms. These key man life insurance policies range from $1,000,000 to
$15,000,000. See "Business -- Innovative Structure" and "Risk Factors -- The
Company and the Affiliated Firms Rely on Key Management Personnel Whose
Continued Service Cannot Be Assured."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its most recent fiscal year, the Company did not have a formal
compensation committee. However, Messrs. Lipnick, Mintz, Strauch and Long
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation. See "-- Committees of the Board of Directors."
71
<PAGE> 73
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In July 1996, the Company acquired one-half of the outstanding capital
stock of MIG from Messrs. Lipnick and Mintz. The remainder of the capital stock
of MIG was contributed to the Company by Messrs. Lipnick and Mintz as a capital
contribution. The principal asset of MIG is a 99% limited partnership interest
in Milestone. The 1% general partnership interest in Milestone is owned by
Messrs. Lipnick and Mintz. Pursuant to the Milestone Agreement, the ownership of
MIG was transferred to the Company in exchange for $637,500 in cash, 2,500,000
shares of Common Stock, warrants to purchase 350,000 shares of Common Stock at
$5.00 per share, contingent earn-out payments and contingent stock options. The
earn-out payments were based on MIG exceeding certain gross revenue targets,
subject to an aggregate cap. In fiscal 1997, Messrs. Lipnick and Mintz received
the aggregate maximum of $637,500 in contingent earn-out payments and 21,250
contingent stock options under the terms of the Milestone Agreement and are
therefore no longer entitled to earn-out payments or stock options under the
Milestone Agreement. The contingent stock options are ten-year options to
purchase Common Stock and were granted based upon the first $637,500 increase in
MIG's gross revenues from 1996 through 1998 in excess of the greater of $637,500
or MIG's greatest revenues in any single prior year since 1996. The applicable
option exercise price per share for any contingent options issued as of the date
of the Offering will automatically be adjusted to equal one-half of the initial
public offering price. Contingent stock options granted to Messrs. Lipnick and
Mintz will be treated as compensation to Messrs. Lipnick and Mintz for fiscal
1998. The acquisition of MIG was treated in a manner similar to a
pooling-of-interests. Accordingly, the assets and liabilities are recorded at
historical cost.
During 1997, the funds for which Silverado provides investment advisory
services, several of the funds for which Milestone provides investment advisory
services, and Preferred Manager Trust and its related offshore fund engaged
Citco Fund Services (USA) and/or Citco Fund Services (Curacao) N.V.,
subsidiaries of the Citco Group, to perform various administrative services. The
Citco Group will be the beneficial owner of 2.6% of the outstanding Common Stock
after giving effect to the Offering. For the year ended December 31, 1997, Citco
Fund Services (USA) and/or Citco Fund Services (Curacao) N.V. received an
aggregate of approximately $44,500 in payment for its services from these
entities.
In March 1998, the Company obtained a $5.0 million unsecured loan from
Citco Banking Corporation N.V., an affiliate of the Citco Group in order to
finance a part of the cash portion of the purchase price for the JMG- Pacific
Acquisition. The Company intends to repay the Citco Loan with a portion of the
net proceeds of the Offering. In connection with the Citco Loan, the Company
issued 17,500 warrants, with an initial exercise price of $10.00 per share, to
Citco Banking Corporation N.V. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In December 1997, the Company entered into a Securities Purchase Agreement
with AJG, whereby on December 26, 1997 AJG invested $10.0 million in the Company
and acquired 100,000 shares of Series B Preferred Stock of the Company. The
proceeds of the investment were used to consummate the Bricoleur Acquisition and
for working capital purposes. Upon consummation of the Offering, the shares of
Series B Preferred Stock will automatically convert into 1,000,000 shares of
Common Stock. In connection with the transaction, AJG Co., the parent of AJG,
agreed to execute and deliver to the Lending Bank a guaranty agreement
guaranteeing $20.0 million of the Company's obligations under the Credit
Agreement. Such guarantee will be canceled upon repayment by the Company of the
outstanding borrowings secured by AJG Co.'s guarantee. See "Use of Proceeds." In
connection with the transaction, the Shareholders' Agreement (as defined in
"Description of Capital Stock -- Registration Rights") was amended to permit the
sale of the Series B Preferred Stock, and AJG and Messrs. Lipnick and Mintz
waived any rights of first refusal arising under the Shareholders' Agreement as
a result of the transaction.
Messrs. Strauch and Long, in addition to serving as executive officers and
Directors of the Company, are employed on a full-time basis by AJG Co., the
parent company of AJG, which will be the beneficial owner of 19.4% of the
outstanding Common Stock after giving effect to the Offering (including the
number of shares of Common Stock having a total purchase price of $3 million,
which the Company expects to be purchased by AJG in the Offering). Pursuant to
the terms of the Strauch and Long Agreements, Messrs. Strauch and Long
72
<PAGE> 74
have agreed to devote a sufficient amount of their time, attention and energies
to the business of the Company as may be required by their positions. AJG has
been apprised of the Strauch and Long Agreements and has consented to the terms
and conditions contained therein. See "Management -- Employment Agreements."
Under the Employment Agreements, Messrs. Lipnick and Mintz have agreed to
devote substantially all of their working time to the management of the Company.
However, Messrs. Lipnick and Mintz continue to be engaged, to a limited extent,
in business activities other than those of the Company. Such activities, which
are not directly competitive with the Company's activities, include ownership
and management of entities which provide investment advisory services and which
act as general partner for certain investment limited partnerships. In 1982, Mr.
Lipnick founded Wharton Management, which acts as the general partner for the
Cash Alternative Fund L.P., a corporate cash management investment vehicle, in
which Asset Alliance Holding Corp. had a limited partnership interest of
approximately 35% as of December 31, 1997. Mr. Lipnick currently serves as
President and a Director and Mr. Mintz serves as the Executive Vice President
and a Director of Wharton Management. In addition, Mr. Lipnick serves as the
President and Director and Mr. Mintz serves as Executive Vice President,
Secretary, Director and a registered principal of Manager Advisory Group Inc., a
registered broker-dealer which provides investment and brokerage services to
various institutional investors. Messrs. Lipnick and Mintz also continue to
manage Milestone through their ownership of its 1% general partner, Milestone
Fund Manager Inc. Mr. Lipnick serves as the President, Chief Executive Officer
and a Director of Milestone Fund Manager Inc. and Mr. Mintz serves as Executive
Vice President and a Director.
The Company receives the benefit of various services provided under certain
contracts to which Wharton Management is a signatory. Accordingly, in 1996, the
Company entered into an expense reimbursement agreement with Wharton Management
pursuant to which the Company reimburses Wharton Management for its
proportionate share of such services, which ranges from 75% to 100%. For the
year ended December 31, 1997, the Company reimbursed Wharton Management for
approximately $116,500 in expenses under this agreement.
In 1997, both Milestone Plus Partners L.P. and Milestone Plus Ltd., for
which Milestone provides investment advisory services, entered into facilities
agreements with Wharton Management, pursuant to which Wharton Management
provides certain services, including, but not limited to, office space,
personnel support, office equipment and operational services. For the year ended
December 31, 1997, Milestone Plus Partners L.P. and Milestone Plus Ltd.
reimbursed Wharton Management for approximately $69,000 and $63,000,
respectively, in expenses under these agreements.
In 1997, Equity Plus, for which Trust Advisors provides investment advisory
services, entered into a facilities agreement with Manager Advisory Group Inc.,
pursuant to which Manager Advisory Group Inc. provides certain services,
including office space, personnel support, office equipment and operational
services. For the year ended December 31, 1997, Equity Plus reimbursed Manager
Advisory Group Inc. for approximately $152,000 in expenses under this agreement.
Although the arrangements described above were not negotiated on an
arm's-length basis, Asset Alliance believes that all of the terms and conditions
of such arrangements are fair to the Company.
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<PAGE> 75
PRINCIPAL STOCKHOLDERS
The following table sets forth as of May 31, 1998, and as adjusted to
reflect the sale of the shares of Common Stock in the Offering, 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. 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) OFFERING OFFERING
--------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Bruce H. Lipnick(3)......................................... 1,690,997 17.8% 9.8%
Arnold L. Mintz(4).......................................... 988,419 10.5 5.8
David R. Long(5)............................................ 28,333 * *
Mark P. Strauch(6).......................................... 28,333 * *
Jefferson F. Allen.......................................... -- -- --
Harvey Silverman(7)......................................... 3,400 * *
AJG Financial Services, Inc.(8)............................. 3,100,000 32.3 19.4(9)
Daniel P. Wimsatt(10)....................................... 1,830,000 19.0 10.6
John I. Bloomberg(11)....................................... 1,094,200 11.5 6.4
Robert M. Poole(12)......................................... 549,000 5.9 3.2
All directors and executive officers as a group (9
persons)(13).............................................. 2,802,016 28.6% 16.0%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
Asset Alliance Corporation, 800 Third Avenue, New York, New York 10022. The
address of AJG Financial Services, Inc., David R. Long and Mark P. Strauch
is c/o Arthur J. Gallagher & Co., Gallagher Center, Two Pierce Place,
Itasca, Illinois 60143-3141. The address of Daniel P. Wimsatt, John I.
Bloomberg and Robert M. Poole is c/o Bricoleur Capital Management LLC, 8910
University Center Lane, Suite 570, San Diego, California 92122.
(2) In computing the number of shares of Common Stock beneficially owned by a
person, shares of Common Stock subject to options, warrants and convertible
subordinated debentures held by that person that are currently exercisable
or that become exercisable within 60 days of May 31, 1998 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, warrants or convertible subordinated debentures 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. The number of shares of Common Stock outstanding as of May 31, 1998
includes (i) 7,365,000 shares of Common Stock, (ii) 1,875,000 shares of
Common Stock issuable upon the conversion of all outstanding shares of
Series A Preferred Stock and Series B Preferred Stock and (iii) shares of
Common Stock issuable by the Company pursuant to options, warrants and/or
convertible subordinated debentures held by the respective person or group
that are exercisable or that will become exercisable within 60 days of May
31, 1998.
(3) Includes 205,833 shares of Common Stock issuable upon exercise of a
currently exercisable warrant and 72,500 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of May 31, 1998.
Excludes 100,000 shares held by the Oxford Trust II and 100,000 shares held
by the Cambridge
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<PAGE> 76
Trust II, irrevocable trusts for the benefit of Mr. Lipnick's children and
for which Mr. Lipnick does not serve as trustee.
(4) Includes 116,667 shares of Common Stock issuable upon exercise of a
currently exercisable warrant, 65,416 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of May 31, 1998 and
50,000 shares held by the Arnold and Eileen Mintz Trust dated September 5,
1997.
(5) Represents shares issuable upon exercise of outstanding stock options
exercisable within 60 days of May 31, 1998. Excludes 3,100,000 shares of
Common Stock held by AJG Financial Services, Inc. which Mr. Long may be
deemed to beneficially own. Mr. Long disclaims beneficial ownership of all
shares held by AJG Financial Services, Inc.
(6) Represents shares issuable upon exercise of outstanding stock options
exercisable within 60 days of May 31, 1998. Excludes 3,100,000 shares of
Common Stock held by AJG Financial Services, Inc. which Mr. Strauch may be
deemed to beneficially own. Mr. Strauch disclaims beneficial ownership of
all shares held by AJG Financial Services, Inc.
(7) Represents shares issuable upon exercise of outstanding stock options
exercisable within 60 days of May 31, 1998. Excludes 87,500 shares of
Common Stock and 17,500 shares issuable upon exercise of a currently
exercisable warrant held by Spear, Leeds which Mr. Silverman may be deemed
to beneficially own. Mr. Silverman disclaims beneficial ownership of all
shares held by Spear, Leeds.
(8) Includes (i) 175,000 shares issuable upon exercise of a currently
exercisable warrant, (ii) 875,000 shares of Common Stock issuable upon the
automatic conversion upon consummation of the Offering of 100,000 shares of
Series A Preferred Stock and 175,000 shares of Common Stock issuable upon
exercise of a warrant to be issued upon such conversion of Series A
Preferred Stock and (iii) 1,000,000 shares of Common Stock issuable upon
the automatic conversion upon consummation of the Offering of 100,000
shares of Series B Preferred Stock. Does not include the number of shares
of Common Stock having a total purchase price of $3.0 million, which the
Company expects to be purchased by AJG Financial Services, Inc. in the
Offering.
(9) The calculation of percentage of shares of Common Stock beneficially owned
after the Offering includes the number of shares of Common Stock having a
total purchase price of $3.0 million, assuming an initial public offering
price of $12.00 per share, which the Company expects to be purchased by AJG
Financial Services, Inc. in the Offering.
(10) Includes 390,000 shares of Common Stock, subject to adjustment, issuable
upon conversion of a subordinated debenture convertible at the option of
the holder at any time.
(11) Includes 249,600 shares of Common Stock, subject to adjustment, issuable
upon conversion of a subordinated debenture convertible at the option of
the holder at any time.
(12) Includes 117,000 shares of Common Stock, subject to adjustment, issuable
upon conversion of a subordinated debenture convertible at the option of
the holder at any time.
(13) Includes (i) 322,500 shares of Common Stock issuable upon exercise of
currently exercisable warrants, (ii) 247,982 shares issuable upon exercise
of outstanding stock options exercisable within 60 days of May 31, 1998 and
(iii) 2,534 shares of Common Stock, subject to adjustment, issuable upon
conversion of a subordinated debenture convertible at the option of the
holder at any time.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Immediately prior to the consummation of the Offering, 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) 100,000,000 shares of
Common Stock and (ii) 20,000,000 shares of undesignated preferred stock, par
value $.01 per share (the "Preferred Stock").
As of May 31, 1998, there were 7,365,000 shares of Common Stock
outstanding. As of May 31, 1998, options and warrants to purchase an aggregate
of 1,567,094 shares of Common Stock were also outstanding, of which options and
warrants to purchase 1,109,426 shares of Common Stock were then exercisable. As
of May 31, 1998, there were $39.6 million principal amount of subordinated
convertible debentures outstanding, which may be converted into an aggregate of
4,659,308 shares of Common Stock. Upon consummation of the Offering (including
the conversion of the Series A Preferred Stock and the Series B Preferred Stock
into an aggregate of 1,875,000 shares of Common Stock), approximately 16,940,000
shares of 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 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. See "Dividend Policy." The possible issuance of
Preferred Stock with a preference over Common Stock as to dividends could impact
the dividend rights of holders of Common Stock. All outstanding shares of Common
Stock, including the shares offered by this Prospectus, are, or will be upon
consummation of the Offering, fully paid and non-assessable.
The Certificate provides, 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 a majority of the total votes which would be eligible to be
cast by stockholders in the election of such director.
PREFERRED STOCK
Prior to consummation of the Offering, the Company had outstanding 100,000
shares of Series A Preferred Stock and 100,000 shares of Series B Preferred
Stock. Upon consummation of the Offering and without further action by the
Company, beyond the provision of notice of the Offering to the holder of the
Series A Preferred Stock and Series B Preferred Stock 30 days prior to the
effectiveness of this Registration Statement, which the Company has provided to
such holders, the Series A Preferred Stock will automatically convert pursuant
to its terms into 875,000 shares of Common Stock and a warrant to purchase
175,000 shares of Common Stock and the Series B Preferred Stock will
automatically convert pursuant to its terms into 1,000,000 shares of Common
Stock.
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The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 20,000,000 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.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS AND
OF DELAWARE LAW
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 provide for the classification of the Board of
Directors and 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 the 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 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."
Classified Board of Directors
The Certificate provides for a Board of Directors that is divided into
three classes. The directors in Class I will hold office until the first annual
meeting of stockholders following the Offering, the directors in Class II will
hold office until the second annual meeting of stockholders following the
Offering, and the directors in Class III will hold office until the third annual
meeting of stockholders following the Offering (or, in each case, until their
successors are duly elected and qualified or until their earlier resignation,
removal from office for cause or death), and, after each such election, the
directors in each such class will then serve in succeeding terms of three years
and until their successors are duly elected and qualified. The classification
system of electing directors, the ability of stockholders to remove directors
only for cause (and only upon an 80% stockholder vote) and the inability of
stockholders to call a special meeting may tend to discourage a third party from
making a tender offer or otherwise attempting to obtain control of the Company
and may maintain the incumbency of the Board of Directors, as the classification
of the Board of Directors and such other provisions generally increase the
difficulty of, or may delay, replacing a majority of the directors. In addition,
such classification system and such other provisions may be amended only upon an
80% stockholder vote.
Meetings of Stockholders
The Certificate provides that annual meetings of stockholders shall be held
at such hour on such day and at such place within or without the State of
Delaware as may be fixed by the Board of Directors. A special meeting of the
stockholders may be called only by the Chairman of the Board, the President or
the Board of Directors.
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Advance Notice Provisions
The By-Laws provide that nominations for directors may not be made by
stockholders at any annual or special meeting thereof unless the stockholder
intending to make a nomination notifies the Company of its intention a specified
number of days in advance of the meeting and furnishes to the Company certain
information regarding itself and the intended nominee. The By-Laws also require
a stockholder to provide to the Secretary of the Company advance notice of
business to be brought by such stockholder before any annual or special meeting
of stockholders as well as certain information regarding such stockholder and
others known to support such proposal and any material interest they may have in
the proposed business. These provisions could delay until the next stockholders'
meeting stockholder actions that are favored by the holders of a majority of the
outstanding stock of the Company.
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.
Amendment of the Certificate and By-Laws
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;
provided, however, that certain provisions of the Certificate may only be
amended or repealed with the approval of the holders of 80% of the total votes
eligible to be cast with respect to such amendment or repeal.
The Certificate and By-Laws provide 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 80% of the outstanding capital stock entitled to vote with
respect to such amendment or repeal.
Delaware Statutory Business Combination Provision
The Company is subject to Section 203 ("Section 203") of the Delaware
General Corporation Law (the "DGCL") which, subject to certain exceptions,
prohibits a publicly held Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder. The application of Section 203 may limit the
ability of stockholders to approve a transaction that they may deem to be in
their best interests.
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation to or with the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested
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stockholder; or (v) the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation. Section 203 defines an "interested stockholder" as a
person who, together with affiliates and associates, owns (or within the prior
three years did own) 15% or more of the outstanding voting stock of the
corporation.
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, provided that, with certain
limited exceptions, such by-law or charter amendment shall not become effective
until twelve months after the date it is adopted. Neither the Certificate nor
the By-Laws contains any such exclusion.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Certificate provides that a director shall not be liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, to the fullest extent permitted by the DGCL, as it now exists or may
hereafter be amended. The Certificate and the By-Laws also provide that the
Company shall indemnify any and all persons whom it shall have the power to
indemnify, including directors, officers and agents (as determined at the
discretion of the Board of Directors), against any and all expenses, liabilities
or other matters, to the fullest extent permitted by the DGCL. At the present
time, there is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
REGISTRATION RIGHTS
Pursuant to the terms of the Shareholders' Agreement, dated as of July 8,
1996 (the "Shareholders' Agreement") among the Company and certain of its
stockholders, holders of 5,870,500 shares of Common Stock (which includes shares
issuable upon the conversion of the Series A Preferred Stock and Series B
Preferred Stock and shares issuable upon the exercise of currently exercisable
warrants), including AJG and certain members of senior management of the
Company, have the right to require the Company to register their shares up to
four times at the Company's expense. The aggregate market value of the shares to
be registered on each occasion must equal or exceed $2,000,000. The parties to
the Shareholders' Agreement also have the right to include their shares of
Common Stock in a registration statement filed by the Company subsequent to the
Offering whether for its own account or for that of other stockholders. Pursuant
to the terms of subscription agreements entered into by certain stockholders in
connection with a private financing by the Company in 1996, the holders of an
additional 1,050,000 shares of Common Stock (which includes shares issuable upon
the exercise of currently exercisable warrants) also have the right to include
their shares of Common Stock in a registration statement filed by the Company
subsequent to the Offering. In addition, a number of Principals of the
Affiliated Firms have the right to include 9,110,513 shares of Common Stock
(which includes shares issuable upon the exercise of currently exercisable
warrants and options and upon the conversion of subordinated convertible
debentures, including those subordinated convertible debentures which the
Company expects to issue in connection with the MET Acquisition) in a
registration statement filed by the Company subsequent to the Offering, pursuant
to the terms of the transaction documents by which Asset Alliance acquired its
interest in each such Affiliated Firm. See "Business -- Innovative Structure."
All such registration rights are subject to the right of an underwriter
participating in the offering to limit the number of shares included in the
registration. If the underwriter managing such an offering determines to limit
the number of shares offered, holders of such shares will be included in the
offering pro rata after the inclusion of all shares intended to be offered by
the Company and by the parties to the Shareholders' Agreement. All expenses
relating to the filing of such registration statements, excluding underwriting
discounts and selling expenses, will be paid by the Company. See "Risk
Factors -- Registration Rights."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 16,940,000 shares
of Common Stock (18,095,000 shares if the Underwriters' over-allotment option is
exercised in full) outstanding. The 7,700,000 shares of Common Stock (8,855,000
shares if the Underwriters' over-allotment option is exercised in full) offered
hereby will be freely tradable without restriction or further registration under
the Securities Act, except for the 425,000 shares (assuming an initial public
offering price of $12.00 per share) expected to be purchased by certain existing
stockholders and their affiliates and any such shares held by "affiliates" of
the Company, as such term is defined under the Securities Act, which shares will
be subject to the resale limitations of Rule 144. The remaining shares of Common
Stock will be "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares") and will be eligible for resale, subject to the volume,
manner of sale, holding period and other limitations of Rule 144 and to the
agreements with the Underwriters and the Company described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares of Common Stock or the average weekly reported trading volume
during the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain notice requirements and to the availability of current public
information about the Company and must be made in unsolicited brokers'
transactions or to a market maker. A person (or persons whose shares are
aggregated) who is not an "affiliate" of the Company under the Securities Act
during the three months preceding a sale and who had beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such Rule.
In connection with the Offering, the Company and each of the Company's
officers, directors and stockholders have agreed not to dispose of, subject to
certain exceptions, any shares of Common Stock for a period of 270 days from the
date of this Prospectus without the prior written consent of Bear, Stearns & Co.
Inc., on behalf of the Underwriters. Beginning 270 days after the date of this
Prospectus, the Company believes that 7,242,368 shares (including 1,875,000
shares issuable upon the conversion of the Series A Preferred Stock and Series B
Preferred Stock and 457,368 shares issuable upon the conversion of subordinated
convertible debentures) of the Restricted Shares will be eligible for sale in
the public market pursuant to Rule 144 (excluding the Principal Shares). See
"Underwriting."
In connection with the Company's acquisitions, certain Principals holding
an aggregate of approximately 2,805,000 shares of Common Stock and approximately
$53.55 million aggregate principal amount of subordinated convertible debentures
which are convertible into 5,976,940 shares of Common Stock (including $17.85
million aggregate principal amount of subordinated convertible debentures
convertible into 1,785,000 shares of Common Stock, which the Company expects to
issue in connection with the MET Acquisition) have entered into agreements with
the Company which prohibit them from disposing of some or all of the Principal
Shares for periods of up to five years from the date such shares were issued to
them by the Company. The Company Lockup Periods will expire at various times
after February 2000. Upon expiration of the Company Lockup Periods, the
applicable Principal Shares will become eligible for sale in the public market
under Rule 144.
An aggregate of 1,400,000 shares of Common Stock are reserved for issuance
under the 1996 Plan. As of the date of this Prospectus, options to purchase
628,000 shares have been granted pursuant to the 1996 Plan, of which options to
purchase 223,332 shares are currently exercisable, and options to purchase
156,594 shares have been granted pursuant to non-plan stock option agreements,
of which options to purchase 103,594 shares are currently exercisable. After the
Offering, the Company intends to file a registration statement on Form S-8 to
register the shares of Common Stock issuable upon the exercise of options
granted pursuant to the 1996 Plan. Upon effectiveness of such registration
statement, shares issued upon exercise of options granted under the 1996 Plan
will be freely tradeable, except for any shares held by an "affiliate" of the
Company or which are
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subject to a Lockup Agreement. All of the shares of Common Stock which may be
acquired upon the exercise of all currently outstanding options are subject to
Lockup Agreements.
In addition, as of the date of this Prospectus, the Company had outstanding
warrants to purchase 782,500 shares of Common Stock (excluding 175,000 warrants
issuable upon conversion of the Series A Preferred Stock upon consummation of
the Offering), all of which are currently exercisable, and $39.6 million
aggregate principal amount of subordinated convertible debentures which are
convertible into 4,659,308 shares of Common Stock (excluding $17.85 million
aggregate principal amount of subordinated convertible debentures convertible
into 1,785,000 shares of Common Stock which the Company expects to issue in
connection with the MET Acquisition).
Prior to the Offering, there has been no public market for the 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.
Additionally, certain holders of shares outstanding prior to the Offering are
entitled to certain registration rights with respect to their shares. See "Risk
Factors -- 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; Volatility," "-- Shares Eligible for Future Sale" and
"-- Registration Rights."
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UNDERWRITING
The underwriters of the Offering of the Common Stock (the "Underwriters"),
for whom Bear, Stearns & Co. Inc., PaineWebber Incorporated and Prudential
Securities Incorporated are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part), to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
PaineWebber Incorporated....................................
Prudential Securities Incorporated..........................
---------
Total............................................. 7,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that, if any of the
foregoing shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares must be so purchased. The Company
has agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain selected dealers (who
may include the Underwriters) at such public offering price less a concession
not to exceed $ per share. The selected dealers may reallow a
concession to certain other dealers not to exceed $ per share. After
the initial offering to the public, the public offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
Representatives.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company. The Underwriters may elect to cover any short
position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
such persons may stabilize or maintain the price of the Common Stock by bidding
for or purchasing shares of Common Stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in the Offering are reclaimed if shares of
Common Stock previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid also may affect the price of the Common Stock to
the extent that it discourages resales thereof. Such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Company has granted the Underwriters an option to purchase up to
1,155,000 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions, solely to cover over-allotments, if any. Such option may be
exercised at any time until 30 days after the date of this Prospectus. To the
extent the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the public offering price will be determined by
negotiations between the Company and the Underwriters. Among the
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factors to be considered in such negotiations are the nature of the Company's
business, its prospects and management, and the general conditions of the
securities markets at the time of the Offering. There can be no assurance,
however, that the prices at which the shares will sell in the public market
after the Offering will not be lower than the price at which they are sold by
the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
In connection with the Offering, the Company, all of its stockholders,
including AJG and the Citco Group, and each of its officers and directors have
agreed, subject to certain exceptions, that they will not, directly or
indirectly, without the prior written consent of Bear, Stearns & Co. Inc., on
behalf of the Underwriters, offer, pledge, sell, offer to sell, contract to sell
or grant any option to purchase or otherwise sell or dispose (or announce any
offer, pledge, sale, offer of sale, contract of sale, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock or securities exchangeable or exercisable for, or convertible
into, shares of Common Stock or other capital stock for a period of 270 days
after the date of this Prospectus, except in the case of the Company, (i) shares
of Common Stock offered in connection with the Offering, (ii) shares of Common
Stock issued upon the exercise of presently outstanding stock options and
warrants or upon the conversion or exchange of presently outstanding convertible
or exchangeable securities, (iii) shares of Common Stock or such other
securities issued as consideration in future investments or acquisitions to be
made by the Company or any of its subsidiaries and (iv) the issuance of options
to acquire shares of Common Stock or such other securities pursuant to the 1996
Plan to persons who become employees of the Company, provided that such Common
Stock or other securities are made subject to the same 270 day restriction.
Bear, Stearns Securities Corp., an affiliate of Bear, Stearns & Co. Inc.,
is the clearing broker for Milestone, JMG-Pacific and MET. Each of these
Affiliated Firms pays Bear, Stearns Securities Corp. customary charges for its
services as clearing broker. Bear, Stearns Securities Corp. may in the future
serve as clearing broker or in other capacities for one or more additional
Affiliated Firms.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Certain legal matters in connection with the Offering will be passed upon
for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
EXPERTS
The financial statements of the Company at December 31, 1996 and 1997 and
for the period from February 1, 1996 (date of inception) to December 31, 1996
and the year ended December 31, 1997, of JMG-Pacific and MET at December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 and of Trust Advisors at December 31, 1996 and 1997 and for the three
months ended December 31, 1996 and the year ended December 31, 1997, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon and appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Bricoleur at December 31, 1996 and 1997, and
for each of the three years in the period ended December 31, 1997, appearing in
this Prospectus and Registration Statement have been audited by Peterson & Co.,
independent accountants, as set forth in their report thereon and appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
83
<PAGE> 85
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,
D.C. 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 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 at http://www.sec.gov. The Common Stock has been approved for inclusion
on the Nasdaq National Market. Certain reports, proxy statements and other
information of listed companies can be inspected at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements for each fiscal year and quarterly
reports containing unaudited interim financial information for each of the first
three fiscal quarters of each fiscal year.
84
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ASSET ALLIANCE CORPORATION
Report of Independent Auditors........................................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997 and as of March 31, 1998 (unaudited)........ F-4
Consolidated Statements of Operations for the period from February 1, 1996 to December 31, 1996, the year
ended December 31, 1997 and for the three months ended March 31, 1997 (unaudited) and 1998
(unaudited)........................................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the period from February 1, 1996 to
December 31, 1996, for the year ended December 31, 1997 and for the three months ended March 31, 1998
(unaudited)........................................................................................... F-6
Consolidated Statements of Cash Flows for the period from February 1, 1996 to December 31, 1996, for the
year ended December 31, 1997 and for the three months ended March 31, 1997 (unaudited) and 1998
(unaudited)........................................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
BRICOLEUR CAPITAL MANAGEMENT, LLC
Successor of Bricoleur Capital Management, Inc.
Report of Independent Accountants........................................................................ F-21
Statements of Financial Condition as of December 31, 1996 and 1997 and as of March 31, 1998
(unaudited)........................................................................................... F-22
Statements of Income for the years ended December 31, 1995, 1996 and 1997 and for the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited)....................................................... F-23
Statement of Shareholders'/Members' Equity for the years ended December 31, 1995, 1996
and 1997 and for the three months ended March 31, 1998 (unaudited).................................... F-24
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 (unaudited) and 1998 (unaudited)................................................. F-25
Notes to Financial Statements............................................................................ F-26
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
Report of Independent Auditors........................................................................... F-32
Combined Balance Sheet as of December 31, 1996 and 1997 and as of March 31, 1998 (unaudited)............. F-33
Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 (unaudited) and 1998 (unaudited).......................................... F-34
Combined Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1996 and
1997 and for the three months ended March 31, 1998 (unaudited)........................................ F-35
Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 (unaudited) and 1998 (unaudited).......................................... F-36
Notes to Combined Financial Statements................................................................... F-37
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
Report of Independent Auditors........................................................................... F-41
Combined Balance Sheets as of December 31, 1996 and 1997 and as of March 31, 1998 (unaudited)............ F-42
Combined Statements of Income for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 (unaudited) and 1998 (unaudited).......................................... F-43
Combined Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1996 and 1997
and for the three months ended March 31, 1998 (unaudited)............................................. F-44
Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 (unaudited) and 1998 (unaudited).......................................... F-45
Notes to Combined Financial Statements................................................................... F-46
</TABLE>
F-1
<PAGE> 87
<TABLE>
<S> <C>
TRUST ADVISORS LLC
Report of Independent Auditors........................................................................... F-50
Balance Sheets as of December 31, 1996 and 1997 and as of March 31, 1998 (unaudited)..................... F-51
Statements of Income for the three months ended December 31, 1996, for the year ended December 31, 1997
and for the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)........................ F-52
Statements of Changes in Members' Equity for the three months ended December 31, 1996, for the year ended
December 31, 1997 and for the three months ended March 31, 1998 (unaudited)........................... F-53
Statements of Cash Flows for the three months ended December 31, 1996, for the year ended December 31,
1997 and for the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)................... F-54
Notes to Financial Statements............................................................................ F-55
</TABLE>
F-2
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Asset Alliance Corporation
We have audited the accompanying consolidated balance sheets of Asset
Alliance Corporation (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the period from February 1, 1996 (date of inception) to
December 31, 1996 and the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Asset Alliance
Corporation at December 31, 1996 and 1997 and the consolidated results of its
operations and its cash flows for the period from February 1, 1996 (date of
inception) to December 31, 1996 and the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 26, 1998
F-3
<PAGE> 89
ASSET ALLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $3,225,655 $12,171,578 $ 6,456,090
Investment in limited partnership, at market value
(cost $2,500,000, $3,450,000 and $4,200,000 in 1996,
1997 and 1998, respectively)........................ 2,585,989 3,875,235 4,680,947
Fee and other receivables.............................. 700,849 4,546,282 2,230,049
Other current assets................................... 5,008 36,010 110,299
---------- ----------- -----------
Total current assets..................................... 6,517,501 20,629,105 13,477,385
Investments in preferred equity interests................ 1,921,251 3,955,520 47,690,104
Property and equipment -- net............................ 62,470 82,516 362,070
Organization costs -- net................................ 193,718 153,327 141,940
Other.................................................... 1,500 1,500 19,500
---------- ----------- -----------
Total assets................................... $8,696,440 $24,821,968 $61,690,999
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debentures payable..................................... $ -- $ 600,000 $ --
Accounts payable to investment advisors................ 558,931 3,181,853 1,089,866
Other payables and accrued expenses.................... 99,941 127,605 667,500
Dividends payable...................................... 31,250 31,250 156,250
Income taxes payable................................... 30,000 256,100 395,100
Due to affiliates...................................... -- 29,872 4,350
---------- ----------- -----------
Total current liabilities................................ 720,122 4,226,680 2,313,066
Loan payable............................................. -- -- 10,000,000
Deferred income taxes.................................... -- 26,900 26,900
Deferred rent............................................ 20,736 57,932 56,206
Debentures payable....................................... 750,000 2,689,904 9,631,041
Minority interest........................................ 2,030 19,187 8,357
Commitments and contingencies
Stockholders' equity:
Preferred stock; authorized 2,000,000 shares:
Series A Convertible Redeemable, $.01 par value,
100,000 shares issued and outstanding (aggregate
liquidation value of $2,500,000).................. 1,000 1,000 1,000
Series B Convertible Redeemable, $.01 par value,
100,000 shares issued and outstanding (aggregate
liquidation value of $10,000,000)................. -- 1,000 1,000
Common stock, $.01 par value, 100,000,000 shares
authorized (15,000,000 in 1996), 4,425,000 (1996),
4,485,000 (1997) and 7,365,000 (1998) shares issued
and outstanding..................................... 44,250 44,850 73,650
Additional paid-in capital............................. 7,317,250 17,487,250 39,058,450
Retained earnings (accumulated deficit)................ (158,948) 267,265 521,329
---------- ----------- -----------
Total stockholders' equity..................... 7,203,552 17,801,365 39,655,429
---------- ----------- -----------
Total liabilities and stockholders' equity..... $8,696,440 $24,821,968 $61,690,999
========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 90
ASSET ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
FEBRUARY 1, 1996 YEAR ENDED MARCH 31,
(DATE OF INCEPTION) TO DECEMBER 31, -----------------------
DECEMBER 31, 1996 1997 1997 1998
---------------------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Management and incentive fees, including
$110,691 for the period ended
December 31, 1996, $1,132,499 for the
year ended December 31, 1997,
$172,225 for the three months ended
March 31, 1997 and $1,525,796 for the
three months ended March 31, 1998 of
the equity interest from preferred
revenue share........................ $ 914,624 $7,922,284 $1,085,538 $2,842,502
Amortization expense associated
with portion of equity
interest........................ (22,500) (200,731) (37,779) (314,573)
Realized and unrealized appreciation on
investment in limited partnership.... 85,989 339,246 55,524 55,712
---------- ---------- ---------- ----------
Net revenues.............................. 978,113 8,060,799 1,103,283 2,583,641
Expenses:
Sub-advisory fee........................ 529,351 4,864,150 654,230 950,599
Compensation and related expenses....... 296,578 1,412,413 194,311 645,203
Other operating expenses................ 228,294 899,618 128,259 204,380
---------- ---------- ---------- ----------
Total expenses............................ 1,054,223 7,176,181 976,800 1,800,182
---------- ---------- ---------- ----------
Operating income (loss)................... (76,110) 884,618 126,483 783,459
Interest income, net of interest expense
of $13,100 for the period ended December
31, 1996, $76,091 for the year ended
December 31, 1997, $12,816 for the three
months ended March 31, 1997 and $146,328
for the three months ended March 31,
1998.................................... 55,153 36,595 17,519 (23,145)
---------- ---------- ---------- ----------
Income (loss) before income taxes......... (20,957) 921,213 144,002 760,314
Provision for income taxes................ 37,900 357,000 55,219 350,000
---------- ---------- ---------- ----------
Net income (loss)......................... (58,857) 564,213 88,783 410,314
Preferred stock dividend requirement...... 59,783 125,000 31,250 156,250
---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders............................ $ (118,640) $ 439,213 $ 57,533 254,064
========== ========== ========== ==========
Net income (loss) per share available to
common stockholders:
Basic................................... $ (0.03) $ 0.10 $ 0.01 $ 0.05
========== ========== ========== ==========
Diluted................................. $ (0.03) $ 0.09 $ 0.01 $ 0.04
========== ========== ========== ==========
Shares used to compute net income (loss)
per share:
Basic................................... 3,837,228 4,470,833 4,466,667 5,477,000
========== ========== ========== ==========
Diluted................................. 3,837,228 4,630,830 4,466,667 6,824,037
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 91
ASSET ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 1, 1996 (DATE OF INCEPTION) TO
DECEMBER 31, 1996, YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK RETAINED
SERIES A SERIES B COMMON STOCK EARNINGS
---------------- ---------------- ------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ------ ------- ------ --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A
Convertible Redeemable
Preferred Stock, common
stock and warrants to
purchase 175,000 shares
of common stock for
cash..................... 100,000 $1,000 -- $ -- 875,000 $ 8,750 $ 4,990,250 $ -- $ 5,000,000
Issuance of common stock,
warrants to purchase
350,000 shares of common
stock and distribution of
$637,500 to founders in
exchange for ownership of
Milestone Investment
Group, Inc., which, as of
the exchange date, had
losses in excess of
capital of $40,308....... -- -- -- -- 2,500,000 25,000 (662,500) (40,308) (677,808)
Issuance of common stock
and warrants to purchase
35,000 shares of common
stock for acquisition of
investment in Trust
Advisors LLC............. -- -- -- -- 175,000 1,750 498,250 -- 500,000
Dividends on preferred
stock -- $0.59783 per
share.................... -- -- -- -- -- -- -- (59,783) (59,783)
Issuance of common stock
and warrants to purchase
175,000 shares of common
stock for cash........... -- -- -- -- 875,000 8,750 2,491,250 -- 2,500,000
Net loss................... -- -- -- -- -- (58,857) (58,857)
------- ------ ------- ------ --------- ------- ----------- --------- -----------
Balance at December 31,
1996..................... 100,000 1,000 -- -- 4,425,000 44,250 7,317,250 (158,948) 7,203,552
------- ------ ------- ------ --------- ------- ----------- --------- -----------
Issuance of common stock
for acquisition of
investment in Silverado
Capital Management LLC... -- -- -- -- 50,000 500 142,500 -- 143,000
Issuance of 10,000 shares
of common stock and
warrants to purchase
20,000 shares of common
stock relating to credit
agreement................ -- -- -- -- 10,000 100 28,500 -- 28,600
Issuance of Series B
Convertible Redeemable
Preferred Stock for
cash..................... -- -- 100,000 1,000 -- -- 9,999,000 -- 10,000,000
Dividends on preferred
stock -- $1.25 per
share.................... -- -- -- -- -- -- -- (125,000) (125,000)
Distribution to founders of
Milestone Investment
Group, Inc. ............. -- -- -- -- -- -- -- (13,000) (13,000)
Net income................. -- -- -- -- -- -- -- 564,213 564,213
------- ------ ------- ------ --------- ------- ----------- --------- -----------
Balance at December 31,
1997..................... 100,000 1,000 100,000 1,000 4,485,000 44,850 17,487,250 267,265 17,801,365
Issuance of common stock
for acquisition of
investment in Bricoleur
(unaudited).............. -- -- -- 2,880,000 28,800 21,571,200 -- 21,600,000
Dividends on preferred
stock -- $0.3125 per
Series A share and $0.125
per Series B share....... -- -- -- -- -- -- -- (156,250) (156,250)
Net income (unaudited)..... -- -- -- -- -- -- -- 410,314 410,314
------- ------ ------- ------ --------- ------- ----------- --------- -----------
Balance at March 31, 1998
(unaudited).............. 100,000 $1,000 100,000 $1,000 7,365,000 $73,650 $39,058,450 $ 521,329 $39,655,429
======= ====== ======= ====== ========= ======= =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 92
ASSET ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1996 THREE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, --------------------------
1996 1997 1997 1998
------------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ (58,857) $ 564,213 $ 88,783 $ 410,314
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Depreciation and amortization........... 36,992 87,034 20,648 20,012
Equity interest from preferred revenue
share................................. (88,191) (931,768) (134,446) (1,211,223)
Distributions of equity interest from
preferred revenue share............... 44,657 525,978 34,800 193,904
Realized and unrealized appreciation on
investment in limited partnership..... (85,989) (339,246) (55,524) (55,712)
Deferred income taxes................... -- 26,900 -- --
Deferred rent........................... 20,736 37,196 41,675 (1,726)
Minority interest....................... (1,101) 17,157 2,033 (10,830)
Changes in operating assets and
liabilities:
Investment in limited partnership..... (2,500,000) (950,000) -- --
Fee and other receivables............. (521,837) (3,645,433) (929,766) 2,116,233
Other current assets.................. (5,008) (31,002) (10,627) (74,289)
Other................................. (1,500) -- -- (18,000)
Accounts payable to investment
advisors........................... 503,735 2,622,922 561,594 (2,091,987)
Other payables and accrued expenses... (107,769) 27,664 34,548 372,630
Income taxes payable.................. 30,000 226,100 (11,281) 139,000
Due to affiliates..................... -- 29,872 -- (25,522)
----------- ----------- ----------- ------------
Net cash used in operating activities..... (2,734,132) (1,732,413) (357,563) (237,196)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization costs........................ (207,640) -- -- --
Investments in preferred equity
interests............................... (604,650) (885,479) (697,380) (16,050,000)
Additions to property and equipment....... (64,437) (38,089) (19,157) (88,179)
Other..................................... -- (200,000) -- 200,000
----------- ----------- ----------- ------------
Net cash used in investing activities..... (876,727) (1,123,568) (716,537) (15,938,179)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common and
preferred stock......................... 7,500,000 10,000,000 -- --
Proceeds from issuance of debentures...... -- 1,939,904 -- 1,091,137
Proceeds from loan payable................ -- -- -- 10,000,000
Payment of debenture...................... -- -- -- (600,000)
Cash dividend paid........................ (28,533) (125,000) (31,250) (31,250)
Cash distribution to former owners of
Milestone Investment Group, Inc. ....... (637,500) (13,000) -- --
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities.............................. 6,833,967 11,801,904 (31,250) 10,459,887
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents............................. 3,223,108 8,945,923 (1,105,350) (5,715,488)
Cash and cash equivalents at beginning of
period.................................. 2,547 3,225,655 3,225,655 12,171,578
----------- ----------- ----------- ------------
Cash and cash equivalents at end of
period.................................. $ 3,225,655 $12,171,578 $ 2,120,305 $ 6,456,090
=========== =========== =========== ============
Interest paid............................. $ 13,100 $ 63,000 $ -- $ 13,151
=========== =========== =========== ============
Income taxes paid......................... $ 7,900 $ 104,000 $ 66,500 $ 301,200
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 93
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Asset Alliance Corporation (the "Company"), and its wholly-owned subsidiaries,
Asset Alliance Holding Corp., Asset Alliance Investment Services Inc. and Asset
Alliance Advisors Inc.
The Company, which was formed in February 1996 and began operations on July
1, 1996, acquired Milestone Investment Group Inc. ("MIG"), which owns and
consolidates a 99% limited partnership interest in Milestone Global Advisors
L.P. ("MGA"). MIG was owned by the founding stockholders of the Company prior to
July 1, 1996. The acquisition of MIG was treated in a manner similar to a
pooling-of-interests; accordingly, the assets and liabilities are recorded at
historical cost. On July 1, 1996, pursuant to a stock purchase agreement, the
ownership of MIG was transferred to the Company in exchange for $637,500 in
cash, 2,500,000 shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), warrants to purchase 350,000 shares of Common Stock at
$5.00 per share, contingent earn-out payments of $637,500, which were earned and
paid during 1997, and contingent stock options (see Note 10). The contingent
earn-out payments were recorded as compensation. MIG is a 1.01% general partner
in Milestone Plus Partners L.P. ("MPP") and Milestone Millennium L.P. ("MMLP").
The Company accounts for its investments in MPP and MMLP under the equity
method.
The Company is an investment management holding company that acquires
preferred interests in privately owned investment management firms specializing
in alternative investment strategies ("Alternative Managers"). The Company
generally purchases a 50% equity interest in a given firm and is granted a
preferred right to a comparable percentage of the firm's revenues (the
"Preferred Revenue Share").
The Company derives its revenues from its ownership of the preferred
interests in the Alternative Managers in which it acquires an interest (the
"Affiliated Firms"). The Affiliated Firms, including MIG, manage both domestic
and international investment portfolios for corporations, pension funds and
individuals. The Company has a revenue sharing arrangement with each Affiliated
Firm, which generally provides for a Preferred Revenue Share to the Company and
requires the Affiliated Firm to distribute such amounts to the Company on a
preferred basis. All remaining revenues of the Affiliated Firm are allocated to
the principals of the firm, which are generally required to be used first to pay
all expenses of the Affiliated Firm, including salaries, and to fund reserves
and, thereafter, may be distributed to the principals. The principals of the
Affiliated Firms also may be eligible to receive options to acquire shares of
Common Stock at fair market value as an incentive for realized revenue growth.
Principals of the Affiliated Firms typically enter into non-competition
arrangements at the time of acquisition by the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
as of March 31, 1998 and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998 have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
eliminated.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.
F-8
<PAGE> 94
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
REVENUE RECOGNITION
The majority of the Company's revenues are derived from investment advisory
fees charged both as a percentage of investable funds (earned and paid on a
quarterly basis) and performance of the fund (earned and paid on an annual
basis). The Company earned revenues based on a percentage of investable funds
and performance of the funds of $162,080 and $641,853, respectively, for 1996,
and $891,582 and $5,898,203, respectively, for 1997. All fees are accrued on a
monthly basis. All fees receivable are expected to be collected.
The purchase price for the Preferred Revenue Shares are allocated based on
the fair market value of the assets of each Affiliated Firm. The unamortized
costs allocated to contracts are amortized using the straight-line method over
periods ranging from seven to twenty years. Such unamortized costs approximated
$1,825,000 and $2,967,000 at December 31, 1996 and 1997, respectively.
Amortization of such costs were approximately $23,000 and $201,000 for 1996 and
1997, respectively, and is shown as a reduction of the Company's share of income
in such investments.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains its cash and cash equivalents principally in one financial
institution.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of investments and debentures payable approximate fair
value.
PROPERTY AND EQUIPMENT
The Company uses the straight-line method of depreciation for equipment
over a seven-year period. Leasehold improvements are being amortized on a
straight-line basis over the term of the lease or the estimated useful life of
the improvement, whichever is shorter.
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company were
capitalized and are being amortized over five years on a straight-line basis.
STOCK OPTION PLAN
The Company accounts for its stock-based compensation plan in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the fair value method
pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation."
F-9
<PAGE> 95
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
INVESTMENT IN LIMITED PARTNERSHIP, AT MARKET VALUE
The Company has invested certain excess funds in a limited partnership,
which is a fund of funds with the underlying assets being marketable securities.
As determined by management of the Company, such investment is classified as
trading securities and, accordingly, is valued at its net asset value, which
approximates market value, with the change in the net asset value included in
net realized and unrealized appreciation (depreciation) on investment in limited
partnership. Appreciation (depreciation) of the investment in limited
partnership is net of any incentive allocation. The resultant unrealized gains
or losses are included in operations.
2. PROPERTY AND EQUIPMENT
At December 31, 1996 and 1997, property and equipment, at cost, consists of
the following:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Furniture, fixtures and equipment........................... $59,593 $ 82,775
Leasehold improvements...................................... 4,844 19,751
------- --------
64,437 102,526
Less accumulated depreciation and amortization.............. 1,967 20,010
------- --------
$62,470 $ 82,516
======= ========
</TABLE>
3. INVESTMENTS IN PREFERRED EQUITY INTERESTS
In October 1996, the Company acquired a 50% equity interest in Trust
Advisors LLC ("Trust Advisors"), a Delaware limited liability company, for
$600,000 in cash, $750,000 principal amount of subordinated convertible
debentures, 175,000 shares of Common Stock and warrants to purchase 35,000
shares of Common Stock with such shares and warrants valued at $500,000. The
warrants are exercisable for a period of four years at a price of $5.00 per
share, which is subject to adjustment to avoid dilution.
In March 1997, the Company acquired a 50% equity interest in Silverado
Capital Management LLC ("Silverado"), a newly formed Delaware limited liability
company, for $600,000 in cash, $600,000 principal amount of subordinated
convertible debentures and 50,000 shares of Common Stock valued at $143,000. In
January 1998, the Company transferred $600,000 in cash to Silverado in payment
of the debentures.
The Company accounts for these investments under the equity method.
F-10
<PAGE> 96
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The following is a summary of the assets, liabilities, revenues and net
income of Trust Advisors, Silverado and other equity interests at December 31,
1996 and 1997, and for the respective periods of ownership during the periods
then ended, and the Company's investment and equity interest in income of Trust
Advisors, Silverado and the other equity interests:
<TABLE>
<CAPTION>
1996 1997
--------------------------------- -----------------------------------------------
SILVERADO
TRUST TRUST CAPITAL
ADVISORS ADVISORS MANAGEMENT
TOTAL LLC OTHER TOTAL LLC LLC OTHER
---------- ---------- ------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total current assets.......... $ 67,020 $1,062,542 $ 416,108
Long-term assets.............. 9,315 6,678 7,608
---------- ---------- ----------
Total assets.................. $ 76,335 $1,069,220 $ 423,716
========== ========== ==========
Total current liabilities..... $ 25,451 $ 63,788 $ 115,368
Long-term liabilities......... -- -- 103,205
Partners' capital/members'
equity...................... 50,884 1,005,432 205,143
---------- ---------- ----------
Total liabilities and
partners' capital/members'
equity...................... $ 76,335 $1,069,220 $ 423,716
========== ========== ==========
Revenues...................... $ 202,533 $1,997,507 $ 222,872
========== ========== ==========
Net income.................... $ 88,521 $1,397,258 $ (309,650)
========== ========== ==========
Investment in preferred equity
interests................... $1,921,251 $1,884,110 $37,141 $3,955,520 $2,277,602 $1,372,745 $305,173
========== ========== ======= ========== ========== ========== ========
Equity interest in income from
preferred revenue
share -- gross.............. $ 110,691 $ 101,266 $ 9,425 $1,132,499 $ 960,322 $ 87,635 $ 84,542
Amortization expense
associated with portion of
equity interest............. (22,500) (22,500) -- (200,731) (126,119) (74,612) --
---------- ---------- ------- ---------- ---------- ---------- --------
Equity interest in income from
preferred revenue
share -- net................ $ 88,191 $ 78,766 $ 9,425 $ 931,768 $ 834,203 $ 13,023 $ 84,542
========== ========== ======= ========== ========== ========== ========
</TABLE>
4. DEBENTURES PAYABLE AND FINANCING ARRANGEMENTS
In connection with the acquisition of Trust Advisors (see Note 3), the
Company issued $750,000 principal amount of subordinated convertible debentures
which bear interest at the rate of 6.93% per annum, are convertible into 53,229
shares of Common Stock at the option of the holder and mature June 30, 2001. The
Company paid approximately $52,000 in interest on these debentures in 1997 and
$13,100 in 1996.
In connection with the capitalization of Silverado (see Note 3), the
Company, through its subsidiary Asset Alliance Holding Corp., issued $600,000
principal amount of non-interest bearing subordinated debentures, evidencing the
Company's obligation to make an additional capital contribution of $600,000.
Such contribution was made and the debentures were reacquired in January 1998.
During 1997, the Company issued $1,939,904 principal amount of subordinated
convertible debentures to various investors. These instruments bear interest at
a rate of 5.8125% per annum, are convertible into 258,654 shares of Common Stock
at a conversion price of $7.50 per share at the option of the holder on the
earlier of an initial public offering of Common Stock or maturity, and mature at
various dates through November 30, 2000. The Company reserves the right to
redeem these debentures under specific circumstances. The
F-11
<PAGE> 97
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Company paid approximately $24,000 in interest on these debentures in 1997.
Subsequent to year end, the Company issued an additional $926,505 principal
amount of subordinated convertible debentures.
In May 1997, the Company entered into a revolving credit agreement with a
major financial institution (the "Bank"), which is an affiliate of a stockholder
of the Company, which permitted borrowing up to $5,000,000 in the aggregate,
with interest, at the option of the management, at the offshore rate plus 1.25%,
or federal funds rate plus 1.25%, payable quarterly. In connection with this
credit agreement, the Company issued 10,000 shares of Common Stock and warrants
to purchase 20,000 shares of Common Stock to an affiliate of the Bank. The
warrants are exercisable for a period of four years at a price of $5.00 per
share, which is subject to adjustment to avoid dilution. Borrowings outstanding
as of May 27, 1999 will automatically convert to a three-year term loan payable
quarterly in equal principal installments. There were no amounts outstanding
under this agreement at December 31, 1997 (see Note 12).
5. COMMITMENTS
LEASE COMMITMENTS
Office space is leased under operating leases expiring through 2006. The
leases provide for minimum annual rent, plus expense escalations.
At December 31, 1997, the approximate minimum rental commitments under
noncancellable leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 142,000
1999........................................................ 142,000
2000........................................................ 142,000
2001........................................................ 142,000
2002........................................................ 142,000
Thereafter.................................................. 545,000
----------
$1,255,000
==========
</TABLE>
Rent expense amounted to approximately $42,000 and $136,000 in 1996 and
1997, respectively.
SUB-ADVISORY FEE
In July 1996, the Company entered into an agreement with an unaffiliated
investment advisor (the "Advisor"), whereby the Advisor would provide
non-discretionary investment advisory services to the Company, and receive a
consulting fee equal to 70% of management and incentive fees earned by MGA. This
agreement ended in October 1997, at which time the Company entered into a new
arrangement with an unaffiliated investment advisor to provide similar services
for 75% of management and incentive fees earned by MGA.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the two founding
stockholders of the Company, whereby the Company has agreed to pay the
stockholders annual base salaries of $495,000 and $395,000. The stockholders
also will be entitled to receive annual bonuses, to be determined by the Board
of Directors. These agreements are effective January 1, 1998 and will last for a
term of five years.
F-12
<PAGE> 98
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The Company also has entered into agreements with two additional members of
the Board of Directors ("Members"), whereby the Company has agreed to pay the
Members annual base salaries of $105,000 and $95,000, respectively. These
agreements are effective February 1, 1998 and will last for a term of one year.
In March 1998, the Company entered into an employment agreement with an
additional executive officer of the Company, whereby the Company has agreed to
pay the officer an annual base salary of $175,000. The officer also will be
entitled to receive an annual bonus, to be determined by the Board of Directors.
This agreement is effective for a term of five years and will expire on January
1, 2003.
6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
F-13
<PAGE> 99
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The following table sets forth the computation of basic and dilutive
earnings per share for the periods ended December 31, 1996 and 1997 and for the
three months ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
PERIOD ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ------------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income............... $ (58,857) $ 564,213 $ 88,783 $ 410,314
Preferred stock dividend
requirement.................. (59,783) (125,000) (31,250) (156,250)
---------- ---------- ---------- ----------
Numerator for basic earnings per
share-net income (loss)
available for common
stockholders................. 118,640 439,213 57,533 254,064
Preferred stock dividend
requirement for Series A
Preferred Stock which is
dilutive for the three months
ended March 31, 1998......... -- -- -- 31,250
---------- ---------- ---------- ----------
Numerator for diluted earnings
per share.................... $ (118,640) $ 439,213 $ 57,533 $ 285,314
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average
shares....................... 3,837,228 4,470,833 $4,466,667 5,477,000
Effect of dilutive securities:
Series A Preferred Stock..... -- -- -- 875,000
Stock options................ -- 57,806 -- 100,260
Warrants, including for March
1998, 69,958 shares related
to Series A Preferred Stock
conversion................. -- 102,191 -- 371,777
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions.................. 3,837,228 4,630,830 4,466,667 6,824,037
========== ========== ========== ==========
Net (loss) income per share:
Basic........................ $ (0.03) $ 0.10 $ 0.01 $ 0.05
========== ========== ========== ==========
Diluted...................... $ (0.03) $ 0.09 $ 0.01 0.04
========== ========== ========== ==========
</TABLE>
F-14
<PAGE> 100
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
<TABLE>
<CAPTION>
PERIOD ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ------------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Preferred stock -- Series A --
convertible into 875,000 shares
of common stock and 175,000
warrants........................ 1,050,000 1,050,000 1,050,000 --
Preferred stock -- Series B....... -- 1,000,000 -- 1,000,000
Subordinated convertible
debentures...................... 50,000 308,654 50,000 681,350
Stock options..................... 140,000 110,000 150,000 488,000
Warrants.......................... 735,000 -- 735,000 --
</TABLE>
For additional information on the above securities, see Notes 1, 3, 4, 7
and 10. See Note 12 for information on certain Common Stock and subordinated
convertible debentures issued subsequent to December 31, 1997.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 2,000,000 shares of Preferred Stock. The Company
issued during 1996 Series A Convertible Redeemable Preferred Stock, $.01 par
value per share (the "Series A Preferred Stock"), of which 100,000 shares are
issued and outstanding. Each share of Series A Preferred Stock is convertible
into the number of shares of Common Stock that results from dividing $25.00 by
the conversion price per share in effect (currently $2.857), resulting in
875,000 shares. The holder has the right to convert the shares of Series A
Preferred Stock at any time and will receive warrants to purchase 175,000 shares
of Common Stock, at an exercise $5.00 per share, upon conversion.
The Company issued during 1997 Series B Convertible Redeemable Preferred
Stock, $.01 par value per share (the "Series B Preferred Stock"), of which
100,000 shares are issued and outstanding. Each share of Series B Preferred
Stock is convertible into the number of shares of Common Stock that results from
dividing $100.00 by the conversion price per share in effect (currently $10.00)
resulting in 1,000,000 shares. The holder has the right to convert the Series B
Preferred Stock at any time.
Each share of Series A Preferred Stock and Series B Preferred Stock which
remains outstanding on the closing date of a public offering will automatically
convert into Common Stock. The stockholders of the Series A Preferred Stock and
Series B Preferred Stock are entitled to receive cumulative dividends at $1.25
and $5.00, respectively, per share per annum, payable in quarterly installments.
Payment of dividends on the Series B Preferred Stock will commence on April 1,
1998. The Company, after June 30, 1997, may redeem and liquidate the shares of
Series A Preferred Stock at $25.00 per share plus any accrued and unpaid
dividends and, after January 1, 1998, may redeem and liquidate the shares of
Series B Preferred Stock at $100.00 per share plus any accrued and unpaid
dividends. Neither the Series A Preferred Stock nor the Series B Preferred Stock
has voting rights.
COMMON STOCK
During 1997, the Company increased its authorized shares of Common Stock
from 15,000,000 to 100,000,000. The Company has reserved for issuance (i)
1,875,000 shares of Common Stock for conversion of the Series A Preferred Stock
and the Series B Preferred Stock, (ii) 930,000 shares of Common Stock upon
F-15
<PAGE> 101
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
exercise of warrants, (iii) 400,000 shares of Common Stock under the 1996 Plan
(as defined in Note 10) and (iv) 308,654 shares of Common Stock upon conversion
of subordinated convertible debentures of the Company.
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Current:
Federal................................................... $ -- $251,000
State..................................................... 37,900 79,100
------- --------
Total current..................................... 37,900 330,100
Deferred:
Federal................................................... -- 21,300
State..................................................... -- 5,600
------- --------
Total deferred.................................... -- 26,900
------- --------
Total provision for income taxes.................. $37,900 $357,000
======= ========
</TABLE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of deferred tax assets and liabilities
at December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 79,000 $ 72,800
Other deferred tax assets................................... 7,700 63,700
-------- --------
Total deferred tax assets................................... 86,700 136,500
Unrealized income from investments.......................... 10,300 77,600
Other deferred tax liabilities.............................. 5,400 13,000
-------- --------
Total deferred tax liabilities.............................. 15,700 90,600
-------- --------
Net deferred tax asset (liabilities)........................ 71,000 45,900
Valuation allowance......................................... (71,000) (72,800)
-------- --------
Net deferred tax asset (liability) after valuation
allowance................................................. $ -- $(26,900)
======== ========
</TABLE>
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit) computed by applying the U.S. Federal corporate tax rate of
34% to income taxes, as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Computed "expected" tax expense............................. $ (7,100) $313,200
State taxes, net of Federal income tax benefit.............. 25,000 56,000
Increase (decrease) in valuation allowance.................. 14,800 (8,100)
Permanent tax differences and other......................... 5,200 (4,100)
-------- --------
Tax provision............................................... $ 37,900 $357,000
======== ========
</TABLE>
F-16
<PAGE> 102
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The Company and its subsidiaries file a consolidated U.S. Federal corporate
income tax return. The Company does not file a consolidated state income tax
return. Thus, each member of the consolidated group is responsible for its
applicable state income tax. At December 31, 1997, the Company has state net
operating loss carryforwards of approximately $428,000 which will begin to
expire in 2011. The above valuation allowance relates to such carryforwards.
9. RELATED PARTY TRANSACTIONS
The Company's affiliates have various administrative charges of $13,000 for
1996 and $87,500 for 1997, paid to a company which is owned by the founders. The
Company paid investment advisory fees of $57,000 and $128,000 in 1996 and 1997,
respectively, to an affiliated company. At December 31, 1996 and 1997, the
Company had accrued investment advisory fees of $59,233 and $29,872,
respectively, payable to this same company. For other related party
transactions, see Notes 4 and 12.
10. STOCK OPTIONS
Pursuant to the purchase of MIG, the Company granted to the founders of the
Company stock options to purchase up to a maximum of 21,250 shares of Common
Stock over the next three years based on a formula pertaining to MIG exceeding
revenues, as defined in the stock purchase agreement. As of December 31, 1997,
the founders earned such options which were issued in March 1998. The exercise
price of the options is currently $7.50 per share. The exercise price of the
options will be adjusted to one-half of the offering price upon the completion
of an underwritten initial public offering.
In March 1998, pursuant to the acquisition of Trust Advisors, the managers
of Trust Advisors received 15,344 options at $7.50 which will be adjusted to
one-half of the offering price.
In December 1996, the Company established the Asset Alliance 1996 Stock
Option Plan (the "1996 Plan") for employees, directors, consultants and advisors
of the Company to purchase shares of Common Stock.
The Board of Directors is responsible for determining the type of award,
when and to whom awards are granted, the number of shares and terms of the
awards and the exercise price. The exercise price shall not be less than the
fair market value of the Common Stock at the date the option is granted. As
such, the Company has not recorded compensation expense in connection with these
awards. The options are exercisable for a period not to exceed ten years from
the date of the grant. Vesting periods range from immediate vesting to three
years.
The following table summarizes the 1996 Plan's transactions at and for the
periods ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Granted..................................................... 140,000 $3.47
------- -----
Balance outstanding at December 31, 1996.................... 140,000 3.47
Granted..................................................... 120,000 7.29
------- -----
Balance outstanding at December 31, 1997.................... 260,000 $5.23
======= =====
Exercisable at December 31, 1996............................ 20,000 $5.00
======= =====
Exercisable at December 31, 1997............................ 73,333 $4.03
======= =====
</TABLE>
F-17
<PAGE> 103
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), and has been determined as if the
Company had accounted for its employees' stock options under the fair value
method provided by that Statement. The fair value of the options was estimated
at the date of grant using the Black-Scholes option pricing model with the
following assumptions for vested and non-vested options:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
--------------------------
ASSUMPTION 1996 1997
---------- ----------- -----------
<S> <C> <C>
Risk-free interest yield................................... 6.38 - 6.46% 5.92 - 6.56%
Volatility................................................. -- --
Dividend yield............................................. -- --
Average life............................................... 10 years 10 years
</TABLE>
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Pro forma net (loss) income available to common
stockholders:............................................. $(123,240) $408,786
Pro forma net (loss) income per share available to common
stockholders:
Basic.................................................. $ (0.03) $0.09
========= ========
Diluted................................................ $ (0.03) $0.09
========= ========
</TABLE>
The weighted average fair value of options granted during the periods ended
December 31, 1996 and 1997 was $0.96 and $3.11, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS OUTSTANDING OPTIONS EXERCISABLE REMAINING CONTRACTUAL LIFE
- --------------- ------------------- ------------------- --------------------------
<S> <C> <C> <C>
$2.86 100,000 33,333 9.00
$5.00 50,000 40,000 8.97
$7.50 110,000 -- 9.92
------- ------ ----
260,000 73,333 9.08
======= ====== ====
</TABLE>
11. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan covering all eligible
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
The Company's 401(k) plan provides that eligible employees may make
contributions subject to Internal Revenue Service limitations. Under the terms
of the adoption
F-18
<PAGE> 104
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
agreement, the Company may make matching contributions at its discretion. In
1997, the Company contributed approximately $4,700 to the plan.
12. SUBSEQUENT EVENTS
The Company entered into an agreement dated February 20, 1998 pursuant to
which a wholly-owned subsidiary of the Company merged with and into Bricoleur
Capital Management, Inc. ("BCMI"), a Utah corporation. The Company exchanged
2,880,000 shares of Common Stock valued at $21,600,000, $5,850,000 principal
amount of subordinated convertible debentures, which bear interest at the rate
of 7.7% per annum, are convertible into 780,000 shares of Common Stock and
mature on February 28, 2000, and $17,550,000 in cash in exchange for the shares
of BCMI. The assets of BCMI were contributed to Bricoleur Capital Management Co.
LLC (the "LLC"), a Delaware limited liability company, for a 50% equity
ownership interest and a 50% preferred share of the gross revenues of the LLC.
The purchase price is subject to adjustment based on the aggregate revenues of
the LLC through December 31, 1999, with a cap of $5,000,000 in Common Stock. The
principals of BCMI entered into five-year employment agreements and
non-competition agreements with the LLC. The transactions closed on February 27,
1998.
In April 1998, the Company acquired a 50% equity ownership interest and a
50% preferred share of the gross revenues of each of JMG Capital Management,
Inc. and Pacific Capital Management, Inc. ("JMG-Pacific") for an aggregate of
$29,850,000 in cash, $14,930,000 principal amount of the Company's Series A
subordinated convertible debentures, which bear interest at 3.09% per annum, are
convertible into 1,705,970 shares of the Company's Common Stock and mature on
April 30, 2003 and $14,930,000 principal amount of the Company's Series B
subordinated convertible debentures, which bear interest at 3.09% per annum, are
convertible into 1,705,970 shares of the Company's Common Stock and mature on
April 30, 2003. The purchase price is subject to adjustment based on the
aggregate revenues of JMG-Pacific through December 31, 1999, with a cap of
$5,250,000 in common stock. In addition the purchase price is subject to a one-
time reduction based on the revenues of Pacific Capital Management, Inc.'s
successor as of July 1998, with a cap of $5,200,000 payable in cash and by
surrender of a portion of the debentures. The principals of JMG-Pacific entered
into five-year employment agreements and non-competition agreements.
The Company also has agreed to acquire a preferred equity interest in the
operations of Metropolitan Capital Advisors, L.P., Metropolitan Capital Partners
II, L.P. and Metropolitan Capital Partners III, L.P. (collectively "MET") for an
aggregate of $35,700,000, consisting of $17,850,000 in cash and $17,850,000
principal amount of subordinated convertible debentures, which bear interest at
the rate of 2.2% per annum, are convertible into 1,785,000 shares of Common
Stock and mature five years following issuance. The definitive agreement
entitles the Company to a 50% equity ownership interest and a 40% preferred
share of the gross revenues of MET. The purchase price is subject to adjustment
based on the level of assets under management as of the closing date. In
addition, the final purchase price is subject to adjustment based on the
aggregate revenues of MET through June 30, 2000, with a cap of $5,000,000,
payable in Common Stock or, in certain cases, cash.
The Company will account for these investments under the equity method.
The Company has filed a Form S-1 Registration Statement under the
Securities Act of 1933, as amended, in which the Company intends to offer shares
of its Common Stock to the public (the "IPO").
In February 1998, the Company entered into an agreement with the Bank
amending and restating the Company's existing credit agreement with the Bank
dated May 27, 1997 (see Note 4). The new credit agreement permits aggregate
borrowings of up to $30,000,000 in the aggregate. Facility A permits borrowings
of up to $10,000,000 and Facility B permits borrowings of up to $20,000,000.
Interest, at the option of the
F-19
<PAGE> 105
ASSET ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Company, is charged at the offshore or the federal funds rate plus the
applicable margins. The margin for Facility A borrowings is 1.25% and the margin
for Facility B borrowings is 0.50%. Facility B borrowings are guaranteed by a
major stockholder of the Company. This guarantee will terminate upon the IPO.
The credit agreement contains certain financial covenants, including minimum net
worth and debt service coverage requirements, with which, if they had been in
effect as of December 31, 1997, the Company would have been in compliance. The
Company has received a commitment letter from the Bank to provide for a new
credit facility, subject to the consummation of the IPO, in an amount of
$50,000,000, which commitment may be increased at the option of the Company by
up to an additional $50,000,000 provided that no default under such new credit
facility has occurred.
On January 23, 1998, the Company increased the number of shares available
for grant under the 1996 Plan from 400,000 to 1,400,000.
In March 1998, the Company obtained a loan from a stockholder of the
Company. The loan permits borrowing up to $5,000,000 in the aggregate, bearing
interest at prime plus 2%. In connection with this loan, the Company issued
warrants to purchase 17,500 shares of Common Stock. The warrants are exercisable
at a price of $10 per share, which is subject to adjustment if diluted, as
defined in the agreement, and are exercisable through June 30, 2003. Borrowings
under the loan are due June 1, 1998 unless the IPO does not occur, at which
point the loan will be repaid in six monthly installments of $859,000 beginning
June 30, 1998.
F-20
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Bricoleur Capital Management, Inc.
We have audited the accompanying statements of financial condition of
Bricoleur Capital Management, Inc. (the "Company"), formerly Utah Capital
Corporation, as of December 31, 1996 and 1997, and the related statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1995, 1996 and 1997. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bricoleur Capital
Management, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1995, 1996 and
1997 in conformity with generally accepted accounting principles.
/s/ PETERSON & CO.
San Diego, California
March 20, 1998
F-21
<PAGE> 107
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash................................................. $ 80,497 $ 45,888 $ 86,671
Management fee receivable.......................... 360,674 497,419 606,535
Performance fee receivable......................... 2,984,730 7,069,078 4,251,656
Investment securities: trading..................... 181,760 -- --
Investment securities: available-for-sale.......... 434,216 2,461,672 --
Deferred tax assets................................ 21,700 27,700 --
Prepaid expenses................................... 9,641 -- 280,585
---------- ----------- -----------
Total current assets....................... 4,073,218 10,101,757 5,225,447
---------- ----------- -----------
Furniture, equipment and leasehold improvements,
net................................................ 114,202 202,324 194,425
Other assets
Organization costs, net............................ 5,267 1,867 107,892
Investment in limited partnership.................. 666,975 927,393 1,062,524
Security deposits.................................. -- 4,507 4,507
---------- ----------- -----------
Total assets............................... $4,859,662 $11,237,848 $ 6,594,795
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities........... $ 811 $ 57,144 $ 44,713
Current portion of long-term debt.................. 100,000 -- --
Notes payable...................................... -- -- 300,000
Accrued commissions payable........................ 2,950,000 6,900,000 774,681
Income tax payable................................. 321,957 846,800 --
Deferred tax liabilities........................... 166,700 286,300 --
---------- ----------- -----------
Total current liabilities.................. 3,539,468 8,090,244 1,119,394
---------- ----------- -----------
Other long-term liabilities
Deferred tax liabilities........................... 23,800 16,600 --
---------- ----------- -----------
Total liabilities.......................... 3,563,268 8,106,844
Shareholders'/members' equity:
Common stock, $1 par value -- 50,000 shares
authorized; 50,000 shares issued and
outstanding..................................... 50,000 50,000
Retained earnings.................................. 1,228,385 2,856,697
Unrealized gain on investment securities, net...... 18,009 224,307
Members' equity.................................... -- -- 5,475,401
---------- ----------- -----------
Total shareholders'/members' equity........ 1,296,394 3,131,004 5,475,401
---------- ----------- -----------
Total liabilities and
shareholders'/members' equity............ $4,859,662 $11,237,848 $ 6,594,795
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 108
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Performance fees.................. $1,667,284 $4,184,779 $ 9,336,155 $1,341,550 $3,971,626
Asset management fees............. 272,170 807,473 1,457,238 265,348 540,630
Principal transactions............ 1,079,351 1,506,745 1,216,578 104,624 (20)
Partnership income................ 103,091 233,400 260,418 46,951 85,131
Interest and dividends............ 7,224 9,818 13,125 789 182
Other income...................... 24,225 3,928 47,768 -- --
---------- ---------- ----------- ---------- ----------
3,153,345 6,746,143 12,331,282 1,759,262 4,597,549
---------- ---------- ----------- ---------- ----------
Expenses
Employee compensation and
benefits....................... 1,936,765 5,560,014 9,378,502 1,494,381 990,305
Brokerage, administrative and
registration fees.............. 7,181 9,241 2,406 324 4,105
Communications and data
processing..................... 19,337 39,359 100,790 11,197 9,479
Occupancy......................... 19,443 25,904 44,383 9,261 14,209
Depreciation and amortization..... 15,611 21,868 46,244 5,350 17,185
Other expenses.................... 114,072 158,943 311,739 47,898 193,965
---------- ---------- ----------- ---------- ----------
2,112,409 5,815,329 9,884,064 1,568,411 1,229,248
---------- ---------- ----------- ---------- ----------
Operating income.................... 1,040,936 930,814 2,447,218 190,851 3,368,301
Other expense
Interest.......................... (1,611) (6,207) (5,430) (103) --
Loss on investment................ -- (17,500) -- -- --
---------- ---------- ----------- ---------- ----------
Income before income taxes.......... 1,039,325 907,107 2,441,788 190,748 3,368,301
Provision for income taxes.......... 365,212 476,396 813,476 (14,993) (265,600)
---------- ---------- ----------- ---------- ----------
Net income.......................... $ 674,113 $ 430,711 $ 1,628,312 $ 205,741 $3,633,901
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 109
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
STATEMENT OF SHAREHOLDERS'/MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL TOTAL
--------------- RETAINED COMPREHENSIVE SHAREHOLDERS' MEMBERS'
SHARES AMOUNT EARNINGS INCOME EQUITY EQUITY
------ ------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994....................... 50,000 $50,000 $ 123,561 $ -- $ 173,561 $ --
Net income................... 674,113 674,113 --
------ ------- ---------- -------- ---------- -----------
Balance at December 31,
1995....................... 50,000 50,000 797,674 -- 847,674 --
COMPREHENSIVE INCOME
Net income................. 430,711 430,711 --
Unrealized gain, net....... 18,009 18,009 --
---------- -----------
448,720 --
------ ------- ---------- -------- ---------- -----------
Balance at December 31,
1996....................... 50,000 50,000 1,228,385 18,009 1,296,394 --
COMPREHENSIVE INCOME
Net income................. 1,628,312 1,628,312 --
Unrealized gain, net....... 206,298 206,298 --
---------- -----------
1,834,610 --
------ ------- ---------- -------- ---------- -----------
Balance at December 31,
1997....................... 50,000 50,000 2,856,697 224,307 3,131,004 --
COMPREHENSIVE INCOME
Net income................. 1,247,658 1,247,658 --
Unrealized gain, net....... 210,496 210,496 --
------ ------- ---------- -------- ---------- -----------
50,000 50,000 4,104,355 434,803 4,589,158 --
Net effect of merger......... (50,000) (50,000) (4,104,355) (434,803) (4,589,158) 4,589,158
Withdrawal................... (1,500,000)
Net income................... 2,386,243
------ ------- ---------- -------- ---------- -----------
Balance at March 31, 1998.... -- $ -- $ -- $ -- $ -- $ 5,475,401
====== ======= ========== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 110
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 674,113 $ 430,711 $1,628,312 $ 205,740 $3,633,901
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization....... 15,611 21,868 46,244 5,350 17,185
Gain (loss) on investments.......... (1,079,351) (1,506,745) (1,216,578) -- 20
Loss on disposal of assets.......... -- 1,589 -- -- --
Increase in investment in
partnership....................... (103,091) (233,400) (260,418) (37,470) (135,131)
Decrease (increase) in operating assets
Management and performance fees
receivable........................ (1,331,115) (1,807,582) (4,221,093) 1,491,413 2,708,306
Securities owned, net............... 1,011,201 1,454,360 1,398,338 (44,209) --
Deferred tax assets................. (20,000) (1,700) (6,000) 9,600 27,700
Prepaid and other assets............ 17,512 (9,641) 5,134 5,671 (280,585)
Increase (decrease) in operating
liabilities
Commission payable.................. 738,049 2,013,281 3,950,000 (1,586,000) (6,125,319)
Income tax payable.................. 118,809 185,957 524,843 18,143 (846,800)
Deferred tax liabilities............ 230,953 (77,600) (213,700) (72,740) (133,309)
Accounts payable and accrued
expenses.......................... (7,233) (10,705) 56,333 21,781 (12,431)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities............................. 265,458 460,393 1,691,415 17,279 (1,146,463)
CASH FLOWS FROM INVESTING ACTIVITIES
Contributions to investment in
partnership......................... (200,778) -- -- -- --
Purchase of long-term investment....... -- (403,107) (1,495,058) (1,473) (21,844)
Payment for organization costs......... -- -- -- -- (112,500)
Purchase of capital assets............. (33,003) (65,164) (130,966) -- (2,811)
Proceeds from sale of investment....... -- -- -- -- 1,024,401
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.... (233,781) (468,271) (1,626,024) (1,473) 887,246
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt.............. (5,333) (100,000) (100,000) -- --
Proceeds from long-term debt........... -- -- -- 75,000 300,000
---------- ---------- ---------- ---------- ----------
Net cash used in financing activities.... (5,333) (100,000) (100,000) 75,000 300,000
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash.......... 26,344 (107,878) (34,609) 90,806 40,783
Cash, beginning of year.................. 162,031 188,375 80,497 80,497 45,888
---------- ---------- ---------- ---------- ----------
Cash, end of year........................ $ 188,375 $ 80,497 $ 45,888 $ 171,303 $ 86,671
========== ========== ========== ========== ==========
Supplemental Disclosures of Cash Flow
Information:
Interest paid.......................... $ 1,611 $ 6,207 $ 5,430 $ 103 $ --
========== ========== ========== ========== ==========
Income taxes paid...................... $ 35,450 $ 369,739 $ 338,733 $ 68,862 $ 967,385
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 111
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and History
Bricoleur Capital Management, Inc. (the "Company"), formerly Utah Capital
Corporation, is a Utah corporation organized on August 30, 1992 for the purpose
of providing financial advisory services. The Company is the general partner of
Bricoleur Partners, L.P. (the "Partnership") which was organized to invest
primarily in publicly-traded securities. The Company also provides financial
advisory services to JIB Associates and Albany Management Company Limited, which
are also organized to invest primarily in publicly-traded securities.
Basis of Accounting
The Company's financial statements have been prepared on the accrual method
of accounting which recognizes revenues when they are earned and expenses when
they are incurred.
Interim Financial Statements
The consolidated financial statement as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 1998 and the results of operations and cash flows for the three months
ended March 31, 1997 and 1998 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or eliminated.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.
Investment Securities
The Company invests excess funds in marketable equity securities which are
carried on the balance sheet at market value.
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), which requires investments to be classified into the
following three categories: held-to-maturity, trading or available-for-sale.
Held-to-maturity securities are presented at amortized cost while unrealized
gains and losses on any trading securities are included in earnings. Trading
securities are presented at fair market value, with unrealized holding gains and
losses included in earnings. Unrealized gains and losses on available-for-sale
securities are recorded directly to stockholders' equity, net of tax.
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). The realized gain or loss from sales of
investment securities is computed on the first-in, first-out basis. Dividend
income is recorded on the date of record. Interest income is recorded on the
accrual basis.
Valuation of Investment Securities
Investment securities are carried at market value. Securities which are
listed on a national securities exchange and which are freely marketable are
valued at their last sale price or, if no sales occurred on the
F-26
<PAGE> 112
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
valuation date, at the mean between the "bid" and "asked" prices on such day.
Other securities which are publicly traded and which are freely marketable are
valued at their last closing "bid" prices if held "long" and their last closing
"asked" prices if sold "short" as supplied by the National Association of
Securities Dealers, Inc.
Income Taxes
The Company calculates its tax provision in accordance with Statement of
Financial Accounting Standard No. 109. Deferred income taxes reflect the impact
of temporary differences between the tax bases of assets and liabilities and
their financial reporting amounts at year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. The principal reason for the difference
between tax expense computed based on the statutory federal rate and income tax
expense was state income taxes.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are stated at cost and depreciation has been
provided using the straight-line method over the estimated useful lives of
depreciable property ranging from 5 to 7 years.
Leasehold improvements are stated at cost and amortization has been
provided using the straight line method over remaining life of the associated
lease.
Organization Costs
Organization costs are amortized using the straight-line method over a
period of five years.
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 may differ from those estimates.
Securities Sold, Not Yet Purchased
Securities sold, not yet purchased, consisting of domestic common stock,
represent obligations of the Company to make a future delivery of a specific
security and, correspondingly, create an obligation to purchase the security at
prevailing market prices (or deliver the security if owned by the Company) at
the later delivery date. As a result, short sales create the risk that the
Company's ultimate obligation to satisfy the delivery requirement may exceed the
amount of the obligation recorded in the financial statements.
NOTE 2 -- INVESTMENTS IN LIMITED PARTNERSHIP
The Company is the general partner of the Partnership and has accounted for
its investment in the Partnership using the equity method. As such, the
accompanying financial statements reflect the Company's 0.75% and 0.58% equity
interest in the Partnership as of December 31, 1996 and 1997, respectively.
F-27
<PAGE> 113
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In addition, in its role as the general partner, the Company is required to
absorb any deeds, obligations, or losses which may occur in excess of the
limited partners' respective capital accounts and, as a result, it is possible
that the Company could incur a loss which might exceed the amount recorded as
its investment in the Partnership as of December 31, 1997.
A summary of assets and liabilities of the Partnership at December 31, 1996
and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Total assets................................................ $ 113,986,286 $ 223,204,158
Total liabilities........................................... (24,744,688) (62,861,340)
Equity of others............................................ (88,574,623) (159,415,425)
------------- -------------
Investment in Partnership................................... $ 666,975 $ 927,393
============= =============
</TABLE>
A summary of revenues and expenses of the Partnership at December 31, 1995,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Total investment revenues........................ $ 1,036,538 $ 3,136,338 $ 6,541,905
Total investment expenses........................ (330,838) (837,102) (1,539,620)
Total gain on investments, net................... 8,535,838 18,386,323 36,026,997
Net increase in assets of others................. (9,138,447) (20,452,159) (40,768,864)
------------ ------------ ------------
Net increase in Partnership assets............... $ 103,091 $ 233,400 $ 260,418
============ ============ ============
</TABLE>
NOTE 3 -- INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in equity
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Trading securities:
Publicly traded............................... $177,832 $ 3,928 $ -- $181,760
Private placement offering.................... 17,500 -- (17,500) --
-------- ------- -------- --------
Total trading securities........................ $195,332 $ 3,928 $(17,500) $181,760
======== ======= ======== ========
Available-for-sale securities
Equity securities --
Aventine Int'l Fund........................ $403,107 $31,109 $ -- $434,216
======== ======= ======== ========
</TABLE>
F-28
<PAGE> 114
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Trading securities:
Publicly traded............................ $ -- $ -- $ -- $ --
---------- -------- ------- ----------
Total trading securities..................... $ -- $ -- $ -- $ --
========== ======== ======= ==========
Available-for-sale securities
Equity securities --
Aventine Int'l Fund..................... $2,067,765 $393,907 $ -- $2,461,672
========== ======== ======= ==========
</TABLE>
NOTE 4 -- FEES AND COMPENSATION
The Company earned performance fees from the Partnership.
- General partner incentive allocations in 1995, 1996 and 1997 in the
amounts of $1,140,808, $4,032,831, and $7,918,893, representing 20% of
the net increase in partners' capital resulting from operations after the
asset management fee.
- Quarterly asset management fee in 1995, 1996 and 1997 in the amounts of
$272,170, $763,214 and $1,351,987 based on .25% of the partners' ending
capital.
As of December 31, 1996 and 1997 asset management fees totaling $360,674
and $497,419, respectively and performance fees totaling $2,944,730 and
$7,029,078, respectively were due from the Partnership.
NOTE 5 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment, and leasehold improvements at December 31, 1996 and
1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Furniture and fixtures................................. $ 32,454 $ 84,744
Computer equipment..................................... 106,777 123,468
Leasehold improvements................................. 6,572 68,557
-------- --------
145,803 276,769
Less accumulated depreciation and amortization......... 31,601 74,445
-------- --------
$114,202 $202,324
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $11,811, $18,468 and $42,844, respectively. Amortization expense was $3,800,
$3,400 and $3,400, respectively.
F-29
<PAGE> 115
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
NOTE 6 -- INCOME TAXES
The significant components of the Company's deferred tax liabilities and
assets as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities
Unrealized gain on investments....................... $ 13,100 $169,600
Deferred performance fees............................ 153,600 116,700
Depreciation......................................... 23,800 16,600
-------- --------
Total deferred tax liabilities......................... 190,500 302,900
-------- --------
Deferred tax assets
Unrealized loss on investments....................... 7,400 --
State income taxes................................... 11,700 21,200
Unrealized loss on investments....................... 2,600 6,500
-------- --------
Total deferred tax assets.............................. 21,700 27,700
-------- --------
Net deferred tax liability............................. $168,800 $275,200
======== ========
</TABLE>
The significant components of the provision for income taxes for the years
ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.......................................... $109,890 $421,965 $678,843
State............................................ 44,369 120,631 197,833
-------- -------- --------
Total current...................................... 154,259 542,596 876,676
-------- -------- --------
Deferred
Federal.......................................... 166,302 (51,800) (55,400)
State............................................ 44,651 (14,400) (7,800)
-------- -------- --------
Total deferred..................................... 210,953 (66,200) (63,200)
-------- -------- --------
Total provision for income taxes................... $365,212 $476,396 $813,476
======== ======== ========
</TABLE>
NOTE 7 -- RELATED-PARTY TRANSACTIONS
The Company had borrowed funds from a shareholder of the Company in
exchange for a note payable due September 30, 1997. The note carried interest at
the rate of 5.83% annually and was uncollateralized. The note was paid in full,
according to terms.
NOTE 8 -- NET CAPITAL REQUIREMENTS
As a registered investment adviser with the California Department of
Corporations, the Company is required to maintain certain minimum capital
requirements. Under the applicable capital rules, the Company must at all times
maintain: (i) "Tangible Net Capital" at 500% in excess of "Total Aggregate
Indebtedness"; (ii) "Current Net Capital" greater than "Current Aggregate
Indebtedness"; and (iii) "Tangible Net Capital"
F-30
<PAGE> 116
BRICOLEUR CAPITAL MANAGEMENT LLC
SUCCESSOR OF
BRICOLEUR CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
in excess of $25,000. At December 31, 1997, the Company was in compliance with
these minimum capital requirements.
NOTE 9 -- COMMITMENTS
Operating Lease
During 1997, the Company rented its office space. Rent expense for the
years ended December 31, 1995, 1996 and 1997 was $19,443, $25,904 and $44,383,
respectively.
Future minimum obligations for this operating lease as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $54,086
=======
</TABLE>
Employment Agreement
The Company has entered into an employment agreement with the senior vice
president. The agreement provides base payments of $100,000 per year through
January 1, 2003. The agreement also provides equity ownership through the
purchase of stock of the Company.
NOTE 10 -- SUBSEQUENT EVENTS
In February 1998, the Company entered into a Merger Agreement with Asset
Alliance Corporation ("Parent") and Asset Alliance Bricoleur Merger Co., Inc.
("Sub"), a wholly-owned subsidiary of the Parent, pursuant to which the Company
was merged with and into Sub. At the joint expense of Parent and the Company,
Parent will make all regulatory and other filings necessary for Bricoleur
Capital Management LLC, a newly formed Delaware limited liability Company
("LLC"), to continue the business of the Company after the merger. Sub has
transferred to LLC substantially all of its business and net assets in exchange
for a 50% membership interest in LLC and a preferred return equal to 50% of the
LLC's revenue.
F-31
<PAGE> 117
REPORT OF INDEPENDENT AUDITORS
The Shareholders of
JMG Capital Management, Inc.
Pacific Capital Management, Inc.
We have audited the accompanying combined balance sheets of JMG Capital
Management, Inc. and Pacific Capital Management, Inc. (collectively, the
"Corporations") as of December 31, 1996 and 1997, and the related combined
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the management of the Corporations. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of JMG Capital
Management, Inc. and Pacific Capital Management, Inc. at December 31, 1996 and
1997 and the combined results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 26, 1998
F-32
<PAGE> 118
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 115,612 $ 578,220 $ 611,494
Management and incentive fees receivable........... 63,856 -- --
Interest receivable................................ 64,023 -- --
---------- ----------- -----------
Total current assets................................. 243,491 578,220 611,494
Fixed assets, net of accumulated depreciation of
$7,845, $22,196 and $23,936 in 1996, 1997 and 1998,
respectively....................................... 31,682 56,064 57,122
Deferred management and incentive fees............... 288,098 4,845,697 6,771,479
Investments in limited partnerships, at equity....... 5,858,387 8,051,443 5,671,157
---------- ----------- -----------
Total assets............................... $6,421,658 $13,531,424 $13,111,252
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses................................... $ 10,851 $ 20,690 $ 33,040
---------- ----------- -----------
Total current liabilities............................ 10,851 20,690 33,040
Deferred income taxes................................ 37,958 126,559 133,858
Commitments and contingencies
Shareholders' equity:
Common stock of JMG Capital Management, Inc. (no
par value; 1,000,000 shares authorized; 225,000
shares issued and outstanding in 1996 and
1997)........................................... 225,000 225,000 225,000
Common stock of Pacific Capital Management, Inc.
($.01 par value, 1000 shares authorized; 200
issued and outstanding in 1996 and 1997)........ 2 2 2
Note receivable from shareholder................... (200,000) -- --
Retained earnings.................................. 6,347,847 13,159,173 12,719,352
---------- ----------- -----------
Total shareholders' equity................. 6,372,849 13,384,175 12,944,354
---------- ----------- -----------
Total liabilities and shareholders'
equity................................... $6,421,658 $13,531,424 $13,111,252
========== =========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE> 119
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Management and incentive fees... $ 388,485 $1,120,277 $ 5,919,209 $ 807,336 $ 2,399,828
Equity interest in income of
limited partnerships......... 2,288,840 4,073,276 6,631,554 1,352,141 2,007,293
Unrealized appreciation on
deferred revenues............ -- -- 383,774 -- --
Interest income................. 14,642 19,690 29,226 592 1,479
Other revenues.................. 68,099 129,511 77,701 -- 3,588
---------- ---------- ----------- ----------- -----------
Total revenues.................... 2,760,066 5,342,754 13,041,464 2,160,069 4,412,188
Expenses:
Compensation and related
expenses..................... 318,440 414,982 649,531 63,927 68,105
Other operating expenses........ 84,449 183,462 710,409 108,515 214,273
---------- ---------- ----------- ----------- -----------
Total expenses.................... 402,889 598,444 1,359,940 172,442 282,378
---------- ---------- ----------- ----------- -----------
Income before income tax.......... 2,357,177 4,744,310 11,681,524 1,987,627 4,129,810
Income tax........................ 35,000 71,000 175,000 7,472 33,273
---------- ---------- ----------- ----------- -----------
Net income........................ $2,322,177 $4,673,310 $11,506,524 $ 1,980,155 $ 4,096,537
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-34
<PAGE> 120
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON NOTE RECEIVABLE RETAINED
STOCKS FROM SHAREHOLDER EARNINGS TOTAL
-------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995............ $225,000 $(200,000) $ 1,087,449 $ 1,112,449
Net income.......................... -- -- 2,322,177 2,322,177
Shareholders' distributions......... -- -- (335,089) (335,089)
-------- --------- ----------- -----------
Balance at December 31, 1995.......... 225,000 (200,000) 3,074,537 3,099,537
Issuance of common stock of Pacific
Capital Management, Inc.......... 2 -- -- 2
Net income.......................... -- -- 4,673,310 4,673,310
Shareholders' distributions......... -- -- (1,400,000) (1,400,000)
-------- --------- ----------- -----------
Balance at December 31, 1996.......... 225,002 (200,000) 6,347,847 6,372,849
Proceeds from note receivable....... -- 200,000 -- 200,000
Net income.......................... -- -- 11,506,524 11,506,524
Shareholders' distributions......... -- -- (4,695,198) (4,695,198)
-------- --------- ----------- -----------
Balance at December 31, 1997.......... 225,002 -- 13,159,173 13,384,175
Net income (unaudited).............. -- -- 4,096,537 4,096,537
Dividends paid (unaudited).......... -- -- (36,358) (36,358)
Shareholders' distributions
(unaudited)...................... -- -- (4,500,000) (4,500,000)
-------- --------- ----------- -----------
Balance at March 31, 1998
(unaudited)......................... $225,002 $ -- $12,719,352 $12,944,354
======== ========= =========== ===========
</TABLE>
See accompanying notes.
F-35
<PAGE> 121
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income....................... $2,322,177 $ 4,673,310 $11,506,524 $ 1,933,975 $ 4,096,537
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................ 589 5,906 14,351 8,449 1,740
Equity interest in income of
limited partnerships
including incentive fee
allocation................ (2,288,840) (4,073,276) (6,631,554) (1,352,141) (2,007,293)
Unrealized appreciation on
deferred revenues......... -- -- (383,774) -- --
Distributions from
investments in limited
partnerships.............. 700,000 1,500,000 4,493,498 2,500,000 4,500,000
Deferred income taxes....... 18,685 19,273 88,601 (25,322) 7,299
Changes in operating assets
and liabilities:
Interest receivable....... (13,300) (13,337) 64,023 64,023 --
Management and incentive
fees receivable........ -- (351,954) (4,109,970) (436,385) (1,925,782)
Deposits.................. 1,194 -- -- -- --
Accrued expenses.......... 32,341 (43,899) 9,840 16,692 12,350
---------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities..................... 772,846 1,716,023 5,051,539 2,709,291 4,684,851
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Investments in limited
partnerships................... (66,617) (177,030) (55,000) -- (137,421)
Sale to shareholder of limited
partnership interest........... -- -- -- -- 25,000
Additions to fixed assets........ (2,420) (33,826) (38,733) (8,733) (2,798)
---------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (69,037) (210,856) (93,733) (8,733) (115,219)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment received on note
receivable..................... -- -- 200,000 -- --
Principal payment on notes
payable........................ (365,165) -- -- -- --
Issuance of common stock......... -- 2 -- -- --
Dividends paid................... -- -- -- -- (36,358)
Shareholders' distributions...... (335,089) (1,400,000) (4,695,198) (2,500,000) (4,500,000)
---------- ----------- ----------- ----------- -----------
Net cash used in financing
activities..................... (700,254) (1,399,998) (4,495,198) (2,500,000) (4,536,358)
---------- ----------- ----------- ----------- -----------
Net increase in cash............. 3,555 105,169 462,608 200,558 33,274
Cash at beginning of year........ 6,888 10,443 115,612 115,612 578,220
---------- ----------- ----------- ----------- -----------
Cash at end of year.............. $ 10,443 $ 115,612 $ 578,220 $ 316,170 $ 611,494
========== =========== =========== =========== ===========
Income taxes paid................ $ 16,315 $ 50,891 $ 85,282 $ -- $ --
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-36
<PAGE> 122
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined financial statements include the accounts of JMG
Capital Management, Inc., a California corporation ("JMG"), for the three years
ended December 31, 1997 and Pacific Capital Management, Inc., a Delaware
corporation ("PCM" and collectively with JMG, the "Corporations"), for the
period from April 8, 1996 (date of inception) through December 31, 1996 and for
the year ended December 31, 1997. The Corporations are affiliated through common
ownership.
JMG and PCM were formed on March 10, 1992 and April 8, 1996, respectively.
As more fully described in Note 2, JMG is a general partner in JMG Capital
Partners, L.P. ("JMGCP"), a California limited partnership, and JMG Convertible
Investments, L.P. ("JMGCI" and collectively with JMGCP, the "Partnerships"), a
California limited partnership. JMG and JMGCP entered into an agreement in
November 1994 to form JMGCI as 1% general partner and 99% limited partner,
respectively.
PCM is the investment manager of Triton Capital Holdings, Inc., an
international business company incorporated in the Territory of the British
Virgin Islands ("Triton"). The Corporations earn fees for investment management
services provided to the Partnerships and Triton.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The combined financial statements at March 31, 1998 and for the three
months ended March 31, 1997 and 1998 have been prepared by the Corporations
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, as of March 31, 1998 and the results of operations and cash flows for
the three months ended March 31, 1997 and 1998 have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or eliminated.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.
USE OF ESTIMATES
The preparation of the 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.
REVENUE RECOGNITION
The majority of the Corporations' revenues are derived from management
fees, charged as a percentage of the capital balance of each limited partner's
account in the Partnerships and incentive fees charged or incentive allocations
of income received as a percentage of the net increase in net assets, as defined
in the partnership agreement or investment advisory agreement. The Company
receives such revenues from the Partnerships after it has managed a partner's
account for twelve consecutive months.
F-37
<PAGE> 123
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
JMG, as General Partner and investment manager, earns management fees and
receives incentive allocations from JMGCP. Management fees earned and incentive
allocations received for the years ended December 31, 1995, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Management fees........................ $ 388,485 $ 665,943 $1,054,324
Incentive allocations.................. 1,976,715 3,422,705 6,018,565
</TABLE>
PCM, as investment manager, earns management and incentive fees from
Triton. Management and incentive fees earned for the period from April 8, 1996
(date of inception) through December 31, 1996 and for the year ended December
31, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Management fees...................................... $166,236 $1,249,554
Incentive fees....................................... 288,098 3,615,331
</TABLE>
PCM had elected to defer management fees of $558,494 earned in 1997 and
$288,098 and $3,615,331 of incentive fees earned in 1996 and 1997, respectively.
All deferred amounts remain in Triton subject to the claims of general creditors
and are invested in Triton, without any charge for management or performance
fees, and will appreciate (depreciate) accordingly. The appreciation on the
deferred management and incentive fees for the year ended December 31, 1997 were
$42,986 and $340,788, respectively.
FIXED ASSETS
Furniture and equipment are stated at cost. Depreciation of furniture and
equipment is computed on the straight-line basis over the estimated useful lives
of the individual assets, generally three to seven years.
INCOME TAXES
The Corporations' shareholders have elected for the Corporations to be
taxed for Federal income tax purposes as Subchapter S corporations under the
Internal Revenue Code. As a result, the net income and any tax credits of the
Corporations are included in the personal income tax returns of the
Corporations' shareholders. Accordingly, no provision has been made for Federal
income taxes in the accompanying financial statements. For state tax purposes,
the Corporations are subject to an S Corporation tax of 1.5% of pretax earnings.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The deferred tax liability relates primarily to the deferred
management and incentive fees.
F-38
<PAGE> 124
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. INVESTMENT IN LIMITED PARTNERSHIPS
The following is a summary of the assets, liabilities, revenues and net
income of the Partnerships, which is accounted for using the equity method, and
JMG's investment and equity interest in income of the Partnerships at December
31, 1995, 1996, and 1997 and for the years then ended:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Investment in securities and debt
obligations, at market value........... $105,364,101 $233,859,614 $580,957,927
Funds held by brokers.................... 27,253,420 58,616,297 69,350,791
Receivable from brokers.................. 1,644,796 240,000 19,288,875
Other assets............................. 695,757 1,697,304 2,697,032
------------ ------------ ------------
Total assets............................. $134,958,074 $294,413,215 $672,294,625
============ ============ ============
Securities sold, but not yet purchased
at market value........................ $ 83,102,636 $200,755,916 $506,183,507
Payable to brokers....................... 3,830,835 6,912,723 34,477,416
Advance capital contributions............ 1,000,000 137,767 1,014,890
Other liabilities........................ 135,037 151,992 389,689
------------ ------------ ------------
Total liabilities........................ 88,068,508 207,958,398 542,065,502
Net assets............................... 46,889,566 86,454,817 130,229,123
------------ ------------ ------------
Total liabilities and net assets......... $134,958,074 $294,413,215 $672,294,625
============ ============ ============
Revenues................................. $ 14,327,810 $ 27,821,350 $ 53,642,988
============ ============ ============
Net increase in net assets............... $ 10,261,251 $ 18,164,106 $ 31,567,984
============ ============ ============
Investment in limited partnerships....... $ 3,108,081 $ 5,858,387 $ 8,051,443
============ ============ ============
Equity interest in income of limited
partnerships........................... $ 2,288,840 $ 4,073,276 $ 6,631,554
============ ============ ============
Incentive allocation included above...... $ 1,976,715 $ 3,422,705 $ 6,018,565
============ ============ ============
</TABLE>
3. DEFINED CONTRIBUTION PLAN
JMG maintains a money purchase pension plan which requires fixed employer
contributions of 25% of each participant's compensation. The plan covers all
employees who are at least 21 years of age and have completed a minimum of six
months of service. JMG has contributed $53,964, $69,333 and $84,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
4. COMMITMENTS
In June 1996, PCM entered into an Investor Referral Agreement with an
unaffiliated entity to assist in obtaining investors. For these services, PCM
pays a fee in an amount equal to any management (asset-based) fees PCM receives
from Triton relating to investors that were referred to Triton during the first
two years of the Investor Referral Agreement. For the period from April 8, 1996
(date of inception) through December 31, 1996 and the year ended December 31,
1997, referral fees were approximately $52,000 and $398,000, respectively.
F-39
<PAGE> 125
JMG CAPITAL MANAGEMENT, INC.
PACIFIC CAPITAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. RELATED-PARTY TRANSACTIONS
On March 1992, JMG received a secured promissory note from its President
and sole shareholder in the amount of $200,000, bearing interest at 7.33% and
due on March 11, 1998 for the purpose of purchasing shares of stock in JMG.
Principal and interest totaling $270,000 were paid in full in June 1997.
Affiliates of JMG maintain investments of approximately $5,175,000 and
$13,196,000 as of December 31, 1996 and December 31, 1997, respectively, in
JMGCP through nine limited partner accounts.
6. SUBSEQUENT EVENTS
In January 1998, JMG received a $5,878,000 distribution from JMGCP of which
$5,000,000 was distributed to JMG's president and the remainder was invested in
his limited partnership interest.
In April 1998, the Corporations sold a preferred equity interest in each
Corporation for an aggregate of $29,850,000 in cash and $29,850,000 principal
amount of subordinated convertible debentures which bear interest at 3.09% per
annum, are convertible into 3,411,940 shares of the purchaser's common stock and
mature April 30, 2003. The definitive agreements provide for the Corporations to
distribute 50% of revenues less 50% of operating expenses to the extent they
exceed $1.2 million, but do not exceed $2.4 million. As a result of such
transaction, the Corporations were replaced by successor limited liability
corporations as the General Partners and investment managers of the
Partnerships.
7. YEAR 2000 (UNAUDITED)
The Corporations' use of computer applications are not complex. However,
the Corporations are not certain whether their computer programs and systems (or
that of other entities with which they electronically connect) are year 2000
compliant. Management does not believe that the costs of addressing the Year
2000 issue or the consequences of incomplete or untimely resolution of the issue
will have a major impact on the Corporations.
F-40
<PAGE> 126
REPORT OF INDEPENDENT AUDITORS
The Partners of
Metropolitan Capital Advisors, L.P.
Metropolitan Capital Partners II, L.P.
Metropolitan Capital Partners III, L.P.
We have audited the accompanying combined balance sheets of Metropolitan
Capital Advisors, L.P., Metropolitan Capital Partners II, L.P. and Metropolitan
Capital Partners III, L.P. (collectively, the "Partnerships") as of December 31,
1996 and 1997, and the related combined statements of income, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
management of the Partnerships. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Metropolitan
Capital Advisors, L.P., Metropolitan Capital Partners II, L.P. and Metropolitan
Capital Partners III, L.P. at December 31, 1996 and 1997 and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 26, 1998
F-41
<PAGE> 127
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 704,858 $ 1,704,274 $ 292,517
Fees and other receivables.......................... 767,856 1,393,005 541,238
Due from broker..................................... -- -- 346,145
Prepaid expenses.................................... -- -- 148,938
Investment in securities, at market value
(cost -- $50,000)................................ -- 165,584 226,914
---------- ----------- ----------
Total current assets.................................. 1,472,714 3,262,863 1,555,752
Fixed assets -- net of accumulated depreciation of
$5,109, $9,345 and $10,457 in 1996, 1997 and 1998,
respectively........................................ 8,045 11,207 18,743
Investment in limited partnership, at equity.......... 6,344,550 8,136,914 3,174,056
Management and incentive fees receivable.............. 168,819 3,182,553 4,614,933
Other assets.......................................... 65,371 54,183 54,019
---------- ----------- ----------
Total assets................................ $8,059,499 $14,647,720 $9,417,503
========== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accrued expenses.................................... $1,198,094 $ 2,118,512 $ 510,040
Securities sold, but not yet purchased, at market
value............................................ -- -- 226,914
Due to affiliates................................... 22,500 -- 6,250
---------- ----------- ----------
Total current liabilities............................. 1,220,594 2,118,512 743,204
Partners' capital..................................... 6,838,905 12,529,208 8,674,299
---------- ----------- ----------
Total liabilities and partners' capital..... $8,059,499 $14,647,720 $9,417,503
========== =========== ==========
</TABLE>
See accompanying notes.
F-42
<PAGE> 128
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Management fees................... $1,319,695 $2,792,061 $ 7,322,214 $1,590,735 $2,292,817
Equity interest in income of
limited partnership............ 2,670,761 5,456,671 6,741,651 1,658,214 1,378,165
Unrealized appreciation on
investments in securities and
deferred revenues.............. -- -- 202,164 35,479 115,890
Realized gains on investments in
securities..................... -- -- -- -- 72,474
Interest income................... -- 7,371 14,035 9,050 7,057
Other revenues.................... 5,750 78,727 66,945 1,298 3,257
---------- ---------- ----------- ---------- ----------
Total revenues...................... 3,996,206 8,334,830 14,347,009 3,294,776 3,869,660
Expenses:
Compensation and related
expenses....................... 415,807 1,324,980 2,287,354 510,201 599,463
Other operating expenses.......... 532,265 644,891 860,860 147,187 224,287
---------- ---------- ----------- ---------- ----------
Total expenses...................... 948,072 1,969,871 3,148,214 657,388 823,750
---------- ---------- ----------- ---------- ----------
Net income.......................... $3,048,134 $6,364,959 $11,198,795 $2,637,388 $3,045,910
========== ========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-43
<PAGE> 129
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Partners' capital at January 1, 1995.................. $ 38,405 $ 803,192 $ 841,597
Capital contributions............................... 656 156,671 157,327
Distributions....................................... (2,902) (690,750) (693,652)
Net income.......................................... 41,110 3,007,024 3,048,134
-------- ----------- -----------
Partners' capital at December 31, 1995................ 77,269 3,276,137 3,353,406
Capital contributions............................... 4,399 379,241 383,640
Distributions....................................... (32,093) (3,231,007) (3,263,100)
Net income.......................................... 78,119 6,286,840 6,364,959
-------- ----------- -----------
Partners' capital at December 31, 1996................ 127,694 6,711,211 6,838,905
Capital contributions............................... -- 600,000 600,000
Distributions....................................... (57,515) (6,050,977) (6,108,492)
Net income.......................................... 126,722 11,072,073 11,198,795
-------- ----------- -----------
Partners' capital at December 31, 1997................ 196,901 12,332,307 12,529,208
Capital contributions (unaudited)................... -- 212,500 212,500
Distributions (unaudited)........................... (70,582) (7,042,737) (7,113,319)
Net income (unaudited).............................. 32,856 3,013,054 3,045,910
-------- ----------- -----------
Partners' capital at March 31, 1998 (unaudited)....... $159,175 $ 8,515,124 $ 8,674,299
======== =========== ===========
</TABLE>
See accompanying notes.
F-44
<PAGE> 130
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income...................... $ 3,048,134 $ 6,364,959 $11,198,795 $ 2,637,388 $ 3,045,910
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization............... 1,880 3,447 4,889 528 1,112
Equity interest in income of
limited partnership........ (2,670,761) (5,456,671) (6,741,651) (1,658,214) (1,378,165)
Unrealized appreciation on
investments in securities
and deferred revenues...... -- -- (202,164) (35,479) (115,890)
Changes in operating assets
and liabilities:
Receivables................ (281,801) (654,874) (3,552,303) (132,555) (426,268)
Due from broker............ -- -- -- -- (346,145)
Prepaid expenses........... -- -- -- (49,286) (148,938)
Investments in
securities............... -- -- (50,000) (350,000) --
Other assets............... (44,709) (17,613) 10,535 10,698 164
Accrued expenses........... 432,839 765,255 920,418 (461,427) (1,608,472)
Securities sold, but not
yet purchased............ -- -- -- -- 127,129
Due to affiliates.......... -- 22,500 (22,500) 6,250 6,250
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.................... 485,582 1,027,003 1,566,019 (32,097) (843,313)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Distributions from investments
in limited partnership........ 410,012 2,264,467 5,149,287 5,148,696 6,341,023
Contributions to investment in
limited partnership........... (50,000) -- (200,000) (200,000) --
Additions to property and
equipment..................... (13,154) -- (7,398) (7,398) (8,648)
Other assets.................... -- (3,267) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by investing
activities.................... 346,858 2,261,200 4,941,889 4,941,298 6,332,375
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Capital contributions........... 157,327 383,640 600,000 550,000 212,500
Cash distributions.............. (693,652) (3,263,100) (6,108,492) (5,148,696) (7,113,319)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities.................... (536,325) (2,879,460) (5,508,492) (4,598,696) (6,900,819)
----------- ----------- ----------- ----------- -----------
Net increase in cash............ 296,115 408,743 999,416 310,505 (1,411,757)
Cash and cash equivalents at
beginning of period........... -- 296,115 704,858 704,858 1,704,274
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period..................... $ 296,115 $ 704,858 $ 1,704,274 $ 1,015,363 $ 292,517
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-45
<PAGE> 131
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined financial statements include the accounts of
Metropolitan Capital Advisors, L.P. ("MCA"), Metropolitan Capital Partners II,
L.P. ("MCP II") and Metropolitan Capital Partners III, L.P. ("MCP III")
(collectively, the "Partnerships"), which are Delaware limited partnerships and
are affiliated through common ownership. All intercompany transactions and
balances have been eliminated in combination.
MCA was formed on March 1, 1993, and is the sole general partner of Bedford
Falls Investors, L.P.("Bedford"), a Delaware limited partnership that engages in
speculative trading of investment instruments. As general partner in Bedford,
MCA engages in formulating investment strategies, objectives, and selecting
investment positions. Such investment is accounted for under the equity method.
MCP II, was formed on July 1, 1995 for the purpose of providing investment
advisory services and management of clients' assets. MCP III was formed on
August 29, 1996. MCP III acts as investment manager to and manages the capital
of Metropolitan Capital Advisors International Limited ("MCAI"), a British
Virgin Islands company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The combined financial statements as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 have been prepared by the Partnerships
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
as of March 31, 1998 and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998 have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
eliminated.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.
REVENUE RECOGNITION
The majority of the Partnerships' revenues are derived from investment
advisory fees charged both as a percentage of net assets of the funds managed by
the Partnerships (the "funds"), and performance of the funds, as defined in the
investment advisory agreements. The Partnerships earned revenues based on a
percentage of net assets and performance of the funds, of $1,074,591 and
$2,766,124, respectively, for 1995, $1,950,616 and $5,990,140, respectively, for
1996, and $4,064,755 and $9,598,502, respectively, for 1997.
MCP III has elected to defer the receipt of all management and performance
fees earned, approximately $169,000 and $3,014,000 in 1996 and 1997,
respectively, until the year 2007. Pursuant to the partnership agreement for MCP
III, all deferred amounts payable to MCP III remain in MCAI and are invested in
MCAI, without any charge for management or performance fees, and will appreciate
(depreciate) accordingly. The appreciation on the deferred management and
performance fees for the year ended December 31, 1997, was approximately
$87,000.
F-46
<PAGE> 132
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
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.
INCOME TAXES
The Partnerships are not subject to federal, state or local income taxes.
Taxable income or losses from the Partnerships' results of operations accrue to
the individual partners.
FIXED ASSETS
Fixed assets consist of leasehold improvements and furniture and fixtures.
The Partnerships are amortizing leasehold improvements using the straight-line
method over the life of the lease, which expires on June 30, 2000. Depreciation
of furniture and fixtures is computed principally using accelerated methods over
the useful lives of the assets, which is seven years.
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Partnerships are
capitalized and are being amortized over five years on a straight-line basis.
INVESTMENT IN SECURITIES, AT MARKET VALUE
Investment in securities represents trading assets which are held for
resale in anticipation of short-term market movements. Trading account assets,
of marketable equity securities, are stated at market value. Unrealized gains
are included in unrealized appreciation on investments in securities.
2. PARTNERS' CAPITAL
ALLOCATIONS
In accordance with the partnership agreements for the Partnerships, 1% of
profits and losses are allocated to the respective general partners and the
remaining 99% are allocated to the limited partners.
DISTRIBUTIONS
The general partners of each of the Partnerships shall have the sole
discretion in determining the amount and frequency of distributions; provided,
however, that no distribution shall be made that would render the Partnerships
insolvent or that would cause any Partner to have a negative capital account.
WITHDRAWALS
Any limited partner of MCA may, upon 45 days prior written notice to the
other partners, withdraw a portion of its capital account as of the last day of
a fiscal year, provided that such withdrawal shall be not less than $50,000 and
provided that the MCA is able to meet minimum capital requirement as general
partner under the agreement with Bedford.
F-47
<PAGE> 133
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The general partner of MCA may, upon 45 days prior written notice to the
other partners, withdraw a portion of its capital account as of the last day of
a fiscal year, provided that its capital account remaining after such withdrawal
shall be not less than 1% of all the partners' total positive capital account
balances.
A partner of MCA may withdraw a greater amount than stated above, or an
amount at other times during the fiscal year or upon a shorter notice period as
of the last day of a fiscal year, only upon the prior written consent of the
general partners and a majority in interest of the limited partners.
Any limited partner of MCP II or MCP III may withdraw a portion of its
capital account at the discretion of the general partners.
3. INVESTMENT IN LIMITED PARTNERSHIP
The following is a summary of the assets, liabilities, revenues and net
income of Bedford which is accounted for using the equity method and the
Partnerships' investment and equity interest in income of Bedford at December
31, 1995, 1996 and 1997 and for the years then ended:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Investments in marketable securities, at
market value............................ $64,023,458 $109,578,369 $198,610,591
Due from brokers.......................... 12,895,307 10,995,459 17,905,785
Other current assets...................... 1,358,444 13,409,275 2,200,732
----------- ------------ ------------
Total current assets and total assets..... $78,277,209 $133,983,103 $218,717,108
=========== ============ ============
Securities sold, but not yet purchased, at
market value............................ $18,625,922 $ 24,527,966 $ 48,981,348
Other current liabilities................. 1,967,323 5,051,522 3,462,480
----------- ------------ ------------
Total current liabilities................. 20,593,245 29,579,488 52,443,828
Partners' capital......................... 57,683,964 104,403,615 166,273,280
----------- ------------ ------------
Total liabilities and partners' capital... $78,277,209 $133,983,103 $218,717,108
=========== ============ ============
Revenues.................................. $15,051,162 $ 28,364,403 $ 37,685,121
=========== ============ ============
Net income................................ $13,734,409 $ 26,265,625 $ 34,062,262
=========== ============ ============
Investment in limited partnership......... $ 3,152,365 $ 6,344,550 $ 8,136,914
=========== ============ ============
Equity interest in income of limited
partnership............................. $ 2,670,761 $ 5,456,671 $ 6,741,651
=========== ============ ============
</TABLE>
4. COMMITMENTS
Office space is leased under an operating lease expiring on June 30, 2000.
The lease provides for minimum annual rent, plus expense escalations.
F-48
<PAGE> 134
METROPOLITAN CAPITAL ADVISORS, L.P.
METROPOLITAN CAPITAL PARTNERS II, L.P.
METROPOLITAN CAPITAL PARTNERS III, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
At December 31, 1997, the approximate minimum rental commitments under this
noncancellable lease are as follows:
<TABLE>
<S> <C>
1998.............................................. $160,000
1999.............................................. 160,000
2000.............................................. 80,000
--------
$400,000
========
</TABLE>
Rent expense amounted to approximately $51,500, $125,800 and $161,600 in
1995, 1996 and 1997, respectively.
5. CREDIT RISK
One fund represented approximately 91% of total revenues for the year ended
December 31, 1995. One fund represented approximately 86% of total revenues for
the year ended December 31, 1996, and two other funds represented approximately
97% of fees and other receivables at December 31, 1996. Two funds represented
approximately 87% of total revenues for the year ended December 31, 1997, and
two other funds represented approximately 100% of fees and other receivables at
December 31, 1997. Non-current management and incentive fees receivable pertain
to one fund.
6. SUBSEQUENT EVENT
The Partnerships have agreed to sell a 50% preferred equity interest in
MCA, MCP II and MCP III for an aggregate of $35,700,000, consisting of
$17,850,000 in cash and $17,850,000 principal amount of subordinated convertible
debentures which bear interest at 2.2% per annum, are convertible into 1,785,000
shares of the purchaser's common stock and mature five years following issuance.
7. YEAR 2000 (UNAUDITED)
Some of the Company's computer programs and systems are not year 2000
compliant. The Company's use of computer applications is not complex. The
Company expects it will have to modify or replace portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. Management does not believe such related costs will be
significant.
F-49
<PAGE> 135
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Trust Advisors LLC
We have audited the accompanying balance sheets of Trust Advisors LLC (the
"Company") as of December 31, 1996 and 1997, and the related statements of
income, changes in members' equity and cash flows for the three months ended
December 31, 1996 and for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trust Advisors LLC at
December 31, 1996 and 1997 and the results of its operations and its cash flows
for the three months ended December 31, 1996 and for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 26, 1998
F-50
<PAGE> 136
TRUST ADVISORS LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $10,311 $ -- $ 39,431
Investment in investment company, at market value,
which approximates cost............................. -- 100,000 181,631
Accounts receivable.................................... 54,169 962,542 1,252,840
Other current assets................................... 2,540 -- --
------- ---------- ----------
Total current assets..................................... 67,020 1,062,542 1,473,902
Equipment -- net of accumulated depreciation of $6,139,
$7,776 and $8,140 in 1996, 1997 and 1998,
respectively........................................... 4,565 2,928 2,564
Organization costs -- net of accumulated amortization of
$250 and $1,250 in 1996 and 1997, respectively......... 4,750 3,750 3,500
------- ---------- ----------
Total assets................................... $76,335 $1,069,220 $1,479,966
======= ========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accrued expenses....................................... $20,451 $ 49,125 $ 37,999
Due to bank............................................ -- 9,663 --
Due to affiliate....................................... 5,000 5,000 84,000
------- ---------- ----------
Total current liabilities................................ 25,451 63,788 121,999
Members' equity:
Preferred interests.................................... 59,119 578,731 751,110
Other interests (deficit).............................. (8,235) 426,701 606,857
------- ---------- ----------
Total members' equity.......................... 50,884 1,005,432 1,357,967
------- ---------- ----------
Total liabilities and members' equity.......... $76,335 $1,069,220 $1,479,966
======= ========== ==========
</TABLE>
See accompanying notes.
F-51
<PAGE> 137
TRUST ADVISORS LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------
1996 1997 1997 1998
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Investment advisory fees............... $184,533 $1,848,644 $ 277,093 $ 531,912
Administrative fees.................... 18,000 72,000 18,000 18,000
Realized and unrealized appreciation on
investment in investment company.... -- -- -- 2,631
Other revenues......................... -- 76,863 19,216 41,889
-------- ---------- ---------- ----------
Total revenues........................... 202,533 1,997,507 314,309 594,432
Expenses:
Compensation and related expenses...... 88,140 438,366 86,138 95,030
Other operating expenses............... 25,872 161,883 151,369 42,974
-------- ---------- ---------- ----------
Total expenses........................... 114,012 600,249 237,507 138,004
-------- ---------- ---------- ----------
Net income............................... $ 88,521 $1,397,258 $ 76,802 $ 456,428
======== ========== ========== ==========
</TABLE>
See accompanying notes.
F-52
<PAGE> 138
TRUST ADVISORS LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1996,
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED OTHER
INTEREST INTERESTS TOTAL
--------- --------- ----------
<S> <C> <C> <C>
Members' equity at October 1, 1996....................... $ 2,510 $ 4,510 $ 7,020
Net income............................................. 101,266 (12,745) 88,521
Distributions.......................................... (44,657) -- (44,657)
--------- -------- ----------
Members' equity at December 31, 1996..................... 59,119 (8,235) 50,884
Contributions.......................................... 50,000 -- 50,000
Net income............................................. 960,322 436,936 1,397,258
Distributions.......................................... (490,710) (2,000) (492,710)
--------- -------- ----------
Members' equity at December 31, 1997..................... 578,731 426,701 1,005,432
Contributions (unaudited)..............................
Net Income (unaudited)................................. 276,272 180,156 456,428
Distributions (unaudited).............................. (103,893) -- (103,893)
--------- -------- ----------
Members' equity at March 31, 1998 (unaudited)............ $ 751,110 $606,857 $1,357,967
========= ======== ==========
</TABLE>
See accompanying notes.
F-53
<PAGE> 139
TRUST ADVISORS LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 88,521 $1,397,258 $ 76,802 $ 456,428
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 705 2,637 659 614
Realized and unrealized appreciation on
investment in investment company.......... -- -- -- (2,631)
Changes in operating assets and liabilities:
Investment in investment company.......... -- (100,000) -- --
Accounts receivable....................... (54,169) (908,373) (23,079) (290,298)
Other current assets...................... (540) 2,540 -- --
Due from affiliate........................ -- -- 2,540 --
Accrued expenses.......................... 20,451 28,674 (12,448) (11,126)
-------- ---------- ---------- ----------
Net cash provided by operating activities...... 54,968 422,736 44,474 152,987
-------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Due to bank.................................... -- 9,663 -- (9,663)
Contributions.................................. -- 50,000 -- --
Distributions.................................. (44,657) (492,710) (34,803) (103,893)
-------- ---------- ---------- ----------
Net cash used in financing activities.......... (44,657) (433,047) (34,803) (113,556)
-------- ---------- ---------- ----------
Net increase (decrease) in cash................ 10,311 (10,311) 9,671 39,431
Cash and cash equivalents at beginning of
period....................................... -- 10,311 10,311 --
-------- ---------- ---------- ----------
Cash and cash equivalents at end of period..... $ 10,311 $ -- $ 19,982 $ 39,431
======== ========== ========== ==========
</TABLE>
See accompanying notes.
F-54
<PAGE> 140
TRUST ADVISORS LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Trust Advisors LLC (the "Company") is engaged in the business of managing
investment vehicles using alternative investment management styles.
The Company was formed as a limited liability company in the State of
Delaware on February 6, 1996 under the name Trust Advisors Group, LLC. On March
6, 1996, the Company amended its name to Trust Advisors LLC. The Company is a
registered investment advisor incorporated in the State of Connecticut. On
September 30, 1996, the Trust Advisors Group, Inc. ("TAG") transferred certain
assets and liabilities to the Company in exchange for preferred and common
equity interests. This transfer included TAG's business, investment and
management contracts and substantially all other assets. On October 1, 1996, TAG
sold its preferred interests in the Company to Asset Alliance Holding Corp.
("AAHC").
AAHC is entitled to receive 50% of gross investment advisory and
administrative fees of the Company. Other members are entitled to receive annual
cash distributions not to exceed the net cash flow of the Company, including
priority distributions, in order to pay their share of certain tax liabilities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1997 and 1998 have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 1998 and the results of operations and cash flows for the three months
ended March 31, 1997 and 1998 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or eliminated.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.
REVENUE RECOGNITION
The majority of the Company's revenues are derived from investment advisory
fees charged both as a percentage of investable funds (earned and paid on a
monthly basis) and performance of the fund (earned and paid on a quarterly
basis). The Company earned revenues based on a percentage of investable funds of
$202,533 for 1996, and revenues based on a percentage of investable funds and
performance of the funds of $953,202 and $967,442, respectively, for 1997. All
fees are accrued on a monthly basis. All fees receivable are expected to be
collected.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains its cash and cash equivalents principally in one financial
institution.
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
F-55
<PAGE> 141
TRUST ADVISORS LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PROPERTY AND EQUIPMENT
The Company uses the straight-line method of depreciation. Fixed assets are
depreciated over five and seven year periods.
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company were
capitalized and are being amortized over five years on a straight-line basis.
INCOME TAXES
The Company is treated as a partnership for federal and state income tax
purposes and, accordingly, all income and losses are reported by its individual
members.
INVESTMENT IN INVESTMENT COMPANY, AT MARKET VALUE
The Company invests certain excess funds in an investment company, which is
a fund of funds with the underlying assets being marketable securities. As
determined by management of the Company, such investment is classified as
trading securities and, accordingly, is valued at its net asset value, which
approximates market value, with the change in the net asset value included in
net realized and unrealized appreciation (depreciation) on investment in
investment company. Appreciation (depreciation) of investment in investment
company is net of any incentive allocation. The resultant unrealized gains or
losses are included in operations.
2. COMMITMENTS
LEASE COMMITMENTS
The Company is obligated under operating leases for software and office
equipment that expire at various dates through September 1998. The Company
leases office facilities in Connecticut under a noncancellable operating lease
that expires in 1999.
At December 31, 1997, the approximate minimum rental commitments under
noncancellable leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $36,000
1999........................................................ 36,000
-------
Total minimum lease payments................................ $72,000
=======
</TABLE>
Rent expense for the three months ended December 31, 1996 and the year
ended December 31, 1997 was approximately $8,000 and $34,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two executives of
the Company, whereby the Company has agreed to pay each of the executives annual
base salaries of $100,000. These agreements were effective October 1, 1996 and
will last for a term of five years.
F-56
<PAGE> 142
TRUST ADVISORS LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. RELATED PARTY TRANSACTIONS
Amounts due to affiliates pertain to organization expenses paid for by an
affiliated company. This amount is payable upon demand.
4. CREDIT RISK
Two customers represented approximately 96% of total revenues for the three
months ended December 31, 1996, and 91% of accounts receivable at December 31,
1996. Two customers represented approximately 80% of total revenues for the year
ended December 31, 1997, and one of these customers represented approximately
88% of accounts receivable at December 31, 1997.
F-57
<PAGE> 143
======================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING 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 BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. 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 THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 12
Use of Proceeds......................... 21
Dividend Policy......................... 21
Capitalization.......................... 22
Dilution................................ 23
Selected Historical Financial Data...... 24
Unaudited Pro Forma Consolidated
Financial Information................. 26
Business................................ 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 54
Management.............................. 63
Certain Relationships and Related Party
Transactions.......................... 72
Principal Stockholders.................. 74
Description of Capital Stock............ 76
Shares Eligible for Future Sale......... 80
Underwriting............................ 82
Legal Matters........................... 83
Experts................................. 83
Additional Information.................. 84
Index to Financial Statements........... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, 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.
======================================================
======================================================
7,700,000 SHARES
[ASSET ALLIANCE CORP. LOGO]
[leaders in alternative investment management LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
, 1998
======================================================
<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred by the
Registrant in connection with the Offering described in this Registration
Statement (excluding underwriting discounts and commissions). All such amounts
are estimated except for the SEC Registration Fee, the Nasdaq National Market
listing fee and the National Association of Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 33,959
Nasdaq National Market Listing Fee.......................... 95,000
NASD Filing Fee............................................. 12,012
Accounting Fees and Expenses................................ 350,000
Legal Fees and Expenses..................................... 500,000
Printing Expenses........................................... 400,000
Blue Sky Qualifications Fees and Expenses................... 5,000
Transfer Agent's Fee........................................ 2,500
Miscellaneous............................................... 101,529
----------
TOTAL............................................. $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that the Company shall, to the fullest extent permitted
by Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
The Company's Amended and Restated By-Laws provide for indemnification by
the Company of its directors, officers and certain non-officer employees under
certain circumstances against expenses (including attorneys fees, judgments,
fines and amounts paid in settlement) reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal proceeding
in which any such person is involved by reason of the fact that such person is
or was an officer or employee of the Company if such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to criminal actions or
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
II-1
<PAGE> 145
The Company's Certificate also provides that no director shall be
personally liable to the Company or its stockholders for monetary damages
resulting from breaches of their fiduciary duty as directors, except (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
which makes directors liable for unlawful dividend payments or stock redemptions
or repurchases, or (iv) for any transaction from which directors derived an
improper personal benefit.
Expenses for the defense of any action for which indemnification may be
available may be advanced by the Company under certain circumstances.
The general effect of the foregoing provisions may be to reduce the
circumstances which an officer or director may be required to bear the economic
burden of the foregoing liabilities and expenses.
The Company's directors and officers will be covered by liability insurance
indemnifying them against damages arising out of certain kinds of claims which
might be made against them based on their negligent acts or omissions while
acting in their capacity as such.
The Underwriting Agreement filed as Exhibit 1.1 provides that the
Underwriters named therein will indemnify and hold harmless the Company and each
director, officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), and the Underwriting Agreement provides that such
Underwriters will contribute to certain liabilities of such persons under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the time that the Company was founded in February 1996, the Company
has issued unregistered securities to a limited number of persons, as described
below. No underwriters or underwriting discounts or commissions were involved.
There was no public offering in any such transaction, and the Company believes
that each transaction was exempt from the registration requirements of the
Securities Act by reason of Section 4(2) thereof, based on the private nature of
the transactions and the financial sophistication of the purchasers, all of whom
had access to complete information concerning the Company and acquired the
securities for investment and not with a view to the distribution thereof.
(1) On June 10, 1996, the Company issued an aggregate of 2,500,000 shares
of the Company's Common Stock and 350,000 Redeemable Common Stock
Purchase Warrants (each convertible into one share of Common
Stock)("Warrants"), at an initial exercise price of $5.00 per share, to
Bruce H. Lipnick and Arnold L. Mintz in exchange for capital
contributions to the Company consisting of 300 shares of common stock,
par value $0.01 per share, of Milestone Investment Group Inc., a
Delaware corporation, valued at approximately $1.25 million.
(2) On July 8, 1996, the Company issued an aggregate of 100,000 shares of
the Company's Series A Convertible Redeemable Preferred Stock
(convertible into 875,000 shares of Common Stock and 175,000 Redeemable
Common Stock Purchase Warrants (each convertible into one share of
Common Stock), at an initial exercise price of $5.00 per share),
875,000 shares of the Company's Common Stock and 175,000 Redeemable
Common Stock Purchase Warrants (each convertible into one share of
Common Stock), at an initial exercise price of $5.00 per share, for an
aggregate purchase price of $5 million to AJG Financial Services, Inc.
(3) Between August 11, 1996 and December 18, 1996, the Company issued an
aggregate of 875,000 shares of the Company's Common Stock and 175,000
Redeemable Common Stock Purchase Warrants (each convertible into one
share of Common Stock), at an initial exercise price of $5.00 per
share, for an aggregate purchase price of $2.5 million to Walter A.
Rhulen, Peter L. Rhulen, Ira D. Riklis, Mauricio Epelbaum and Lidia
Epelbaum as Trustees for the Epelbaum Revocable Trust 1990, Spear,
Leeds & Kellogg, The Citco Group Limited and New Frontier Partners.
(4) On January 2, 1997, the Company issued an aggregate of 175,000 shares
of the Company's Common Stock and 35,000 Redeemable Common Stock
Purchase Warrants (each convertible into
II-2
<PAGE> 146
one share of Common Stock), at an initial exercise price of $5.00 per
share and $750,000 in principal amount of convertible subordinated
debentures (convertible into 50,000 shares of Common Stock) in
connection with the Company's investment in Trust Advisors LLC.
(5) On May 11, 1997, the Company issued an aggregate of 50,000 shares of
the Company's Common Stock in connection with the Company's investment
in Silverado Capital Management LLC.
(6) On March 27, 1997, the Company issued an aggregate of 10,000 shares of
the Company's Common Stock and 20,000 Redeemable Common Stock Purchase
Warrants (each convertible into one share of Common Stock), at an
initial exercise price of $5.00 per share to BankAmerica Investment
Corporation in connection with the execution of a Credit Agreement
dated as of May 27, 1997 among the Company, Asset Alliance Holding
Corp. and Bank of America Illinois.
(7) On December 26, 1997, the Company issued 100,000 shares of Series B
Convertible Redeemable Preferred Stock (convertible into 1,000,000
shares of the Company's Common Stock) for an aggregate purchase price
of $10 million to AJG Financial Services, Inc.
(8) Between October 1, 1997 and April 1, 1998, the Company issued an
aggregate of $3,106,041 in principal amount of adjustable rate
subordinated convertible debentures (convertible into an aggregate of
approximately 414,139 shares of Common Stock) in connection with
investments made in Asset Alliance Preferred Manager Trust LLC, a
private investment fund whereby investors' assets under management are
allocated among underlying investment vehicles established by the
Company's Affiliated Firms.
(9) On February 27, 1998, the Company issued 10,000 Redeemable Common Stock
Purchase Warrants (each convertible into one share of Common Stock), at
an initial exercise price of $12.50 per share to Bank of America
National Trust and Savings Association in connection with the execution
of an Amended and Restated Credit Agreement dated as of February 27,
1998 among the Company, Asset Alliance Holding Corp. and Bank of
America National Trust and Savings Association.
(10) On February 27, 1998, the Company issued an aggregate of 2,880,000
shares of the Company's Common Stock and $5,850,000 in principal
amount of convertible subordinated debentures (convertible into
780,000 shares of Common Stock) in connection with the Company's
investment in Bricoleur Capital Management LLC.
(11) On March 26, 1998, the Company issued 17,500 Redeemable Common Stock
Purchase Warrants (each convertible into one share of Common Stock),
at an initial exercise price of $10.00 per share to Citco Banking
Corporation N.V. in connection with the execution of a $5 million loan
agreement dated as of March 26, 1998 between the Company and Citco
Banking Corporation N.V.
(12) On April 28, 1998, the Company issued an aggregate of $29,854,477
principal amount of subordinated convertible debentures (convertible
into approximately 3,411,940 shares of Common Stock) in connection
with the Company's investment in JMG Capital Management LLC and
Pacific Assets Management LLC.
II-3
<PAGE> 147
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a complete list of Exhibits filed as part
of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement by and among the Company and
the Underwriters.
2.1**+ Merger Agreement dated as of February 20, 1998 by and among
the Company, Asset Alliance Bricoleur Merger Co. Inc.,
Bricoleur Capital Management, Inc., Bricoleur Capital
Management LLC and the shareholders of Bricoleur Capital
Management, Inc. (excluding schedules and exhibits, which
the Company agrees to furnish supplementally to the
Commission upon request).
2.2**+ Stock Purchase Agreement dated as of July 8, 1996 among the
Company, Asset Alliance Holding Corp. and the shareholders
of Milestone Investment Group Inc. (excluding schedules and
exhibits, which the Company agrees to furnish supplementally
to the Commission upon request).
2.3**+ Purchase Agreement dated as of March 26, 1998 by and among
the Company, JMG Capital Management LLC, Pacific Assets
Management LLC, JMG Capital Management, Inc., Pacific
Capital Management, Inc., Jonathan Glaser, Roger Richter and
Daniel David (excluding schedules and exhibits, which the
Company agrees to furnish supplementally to the Commission
upon request).
2.4**+ Purchase Agreement dated as of March 24, 1998 by and among
the Company, Metropolitan Capital Advisors LLC, Metropolitan
Capital Managers LLC, Metropolitan Capital Managers II LLC,
Metropolitan Capital Advisors, Inc., KJ Advisors, Inc.,
Metropolitan Capital III, Inc., Metropolitan Capital
Advisors, L.P., Metropolitan Capital Partners II, L.P.,
Metropolitan Capital Partners III, L.P., Jeffrey Schwarz,
Karen Finerman and Jeffrey Schwarz Children's Trust
(excluding schedules and exhibits, which the Company agrees
to furnish supplementally to the Commission upon request).
3.1** Form of Amended and Restated Certificate of Incorporation.
3.2** Form of Amended and Restated By-Laws.
4.1 Specimen certificate for shares of Common Stock of the
Company.
4.2** Amended and Restated Credit Agreement dated as of February
27, 1998 by and among Bank of America National Trust and
Savings Association, Asset Alliance Holding Corp. and the
Company (excluding schedules and exhibits, which the Company
agrees to furnish supplementally to the Commission upon
request).
4.3** Shareholders' Agreement dated as of July 8, 1996 among Bruce
H. Lipnick, Arnold L. Mintz, AJG Financial Services, Inc.,
Arthur J. Gallagher & Co. and the Company.
4.4** Registration Rights Agreement dated as of February 27, 1998
by and among the Company, John I. Bloomberg, Robert M.
Poole, Daniel P. Wimsatt, Richard Hornbuckle and Steven
Brase.
4.5** Registration and Tag Along Rights Agreement dated as of
October 1, 1996 among the Company, Trust Advisory Group,
Inc., Arnold L. Mintz and Bruce H. Lipnick.
4.6** Registration Rights Agreement dated as of March 11, 1997
among the Company, Silverado Capital Management LLC and
Jeffrey Cohen.
4.7** Registration Rights Agreement dated as of April 28, 1998 by
and among the Company, JMG Capital Management, Inc., Pacific
Capital Management, Inc., Jonathan M. Glaser, Roger Richter
and Daniel A. David.
4.8** Form of Asset Alliance Corporation Subscription Agreement.
4.9** Form of Asset Alliance Corporation Redeemable Common Stock
Purchase Warrant.
</TABLE>
II-4
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
4.10** Asset Alliance Corporation Convertible Subordinated
Debenture due June 30, 2001 held by Trust Advisory Group,
Inc.
4.11** Form of Asset Alliance Corporation Subordinated Debenture
held by stockholders of Bricoleur Capital Management Inc.
4.12** Form of Asset Alliance Corporation Adjustable Rate
Subordinated Convertible Debenture issued to investors in
Asset Alliance Preferred Manager Trust LLC.
4.13** Form of Asset Alliance Corporation Series A Subordinated
Convertible Debenture due April 30, 2003 issued in
connection with the Company's investment in JMG Capital
Management LLC and Pacific Assets Management LLC.
4.14** Form of Asset Alliance Corporation Series B Subordinated
Convertible Debenture due April 30, 2003 issued in
connection with the Company's investment in JMG Capital
Management LLC and Pacific Assets Management LLC.
4.15** Form of Asset Alliance Corporation Subordinated Convertible
Debenture to be issued in connection with the Company's
investment in Metropolitan Capital Managers LLC,
Metropolitan Capital Managers II LLC and Metropolitan
Capital Advisors LLC.
4.16** Form of Registration Rights Agreement to be executed in
connection with the Company's investment in Metropolitan
Capital Managers LLC, Metropolitan Capital Managers II LLC
and Metropolitan Capital Advisors LLC.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to
the legality of the securities being offered.
10.1**+ Bricoleur Capital Management LLC Limited Liability Company
Agreement dated February 27, 1998 by and among Asset
Alliance Management Corp., Asset Alliance Bricoleur Merger
Co. and the signatories thereto (excluding schedules and
exhibits, which the Company agrees to furnish supplementally
to the Commission upon request).
10.2** Milestone Global Advisors L.P. Amended and Restated Limited
Partnership Agreement dated June 28, 1996 by Milestone Fund
Manager Inc. and Milestone Investment Group Inc. (excluding
schedules and exhibits, which the Company agrees to furnish
supplementally to the Commission upon request).
10.3**+ JMG Capital Management LLC Limited Liability Company
Agreement dated April 28, 1998 by and among Asset Alliance
Management Corp., Asset Alliance Holding Corp. and the
signatories thereto (excluding schedules and exhibits, which
the Company agrees to furnish supplementally to the
Commission upon request).
10.8** Asset Alliance Corporation 1996 Stock Option Plan, as
amended by Amendment No. 1 thereto on January 23, 1998.
10.9** Building Lease between the Company and Joseph P. Day Realty
Corp. dated September 12, 1996.
10.10** Building Lease Modification Agreement between the Company
and Joseph P. Day Realty Corp. dated December 8, 1997.
10.11** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Bruce H. Lipnick.
10.12** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Arnold L. Mintz.
10.13** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Mark P. Strauch.
10.14** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and David R. Long.
</TABLE>
II-5
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.15** Employment Agreement dated as of March 12, 1998 between the
Company and Jeffrey J. Ervine.
21 Schedule of Subsidiaries of the Company.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Peterson & Co.
24** Powers of Attorney (set forth on the signature page to this
Registration Statement).
27.1** Financial Data Schedule as of and for the year ended
December 31, 1997.
27.2** Financial Data Schedule as of and for the three months ended
March 31, 1998.
99.1** Consent of Jefferson F. Allen.
99.2** Consent of Harvey Silverman.
</TABLE>
- ---------------
** Previously filed.
+ Certain portions of this Exhibit have been omitted pursuant to a confidential
treatment request filed with the Commission. The omitted portions have been
filed separately with the Commission.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on June 3, 1998.
ASSET ALLIANCE CORPORATION
By: /s/ ARNOLD L. MINTZ
------------------------------------
Name: Arnold L. Mintz
Title: Executive Vice President
and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities indicated on June 3, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President, Chief Executive Officer and
- ----------------------------------------------------- Chairman of the Board (Principal Executive
Bruce H. Lipnick Officer)
* Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer)
Jeffrey J. Ervine
/s/ ARNOLD L. MINTZ Executive Vice President, Chief Operating
- ----------------------------------------------------- Officer and Director
Arnold L. Mintz
* Senior Vice President, Treasurer and
- ----------------------------------------------------- Director
Mark P. Strauch
* Senior Vice President, Acquisitions and
- ----------------------------------------------------- Director
David R. Long
* By /s/ ARNOLD L. MINTZ
- -----------------------------------------------------
Arnold L. Mintz
Attorney-in-fact
</TABLE>
<PAGE> 151
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among the Company and
the Underwriters.
2.1**+ Merger Agreement dated as of February 20, 1998 by and among
the Company, Asset Alliance Bricoleur Merger Co. Inc.,
Bricoleur Capital Management, Inc., Bricoleur Capital
Management LLC and the shareholders of Bricoleur Capital
Management, Inc. (excluding schedules and exhibits, which
the Company agrees to furnish supplementally to the
Commission upon request).
2.2**+ Stock Purchase Agreement dated as of July 8, 1996 among the
Company, Asset Alliance Holding Corp. and the shareholders
of Milestone Investment Group Inc. (excluding schedules and
exhibits, which the Company agrees to furnish supplementally
to the Commission upon request).
2.3**+ Purchase Agreement dated as of March 26, 1998 by and among
the Company, JMG Capital Management LLC, Pacific Assets
Management LLC, JMG Capital Management, Inc., Pacific
Capital Management, Inc., Jonathan Glaser, Roger Richter and
Daniel David (excluding schedules and exhibits, which the
Company agrees to furnish supplementally to the Commission
upon request).
2.4**+ Purchase Agreement dated as of March 24, 1998 by and among
the Company, Metropolitan Capital Advisors LLC, Metropolitan
Capital Managers LLC, Metropolitan Capital Managers II LLC,
Metropolitan Capital Advisors, Inc., KJ Advisors, Inc.,
Metropolitan Capital III, Inc., Metropolitan Capital
Advisors, L.P., Metropolitan Capital Partners II, L.P.,
Metropolitan Capital Partners III, L.P., Jeffrey Schwarz,
Karen Finerman and Jeffrey Schwarz Children's Trust
(excluding schedules and exhibits, which the Company agrees
to furnish supplementally to the Commission upon request).
3.1** Form of Amended and Restated Certificate of Incorporation.
3.2** Form of Amended and Restated By-Laws.
4.1 Specimen certificate for shares of Common Stock of the
Company.
4.2** Amended and Restated Credit Agreement dated as of February
27, 1998 by and among Bank of America National Trust and
Savings Association, Asset Alliance Holding Corp. and the
Company (excluding schedules and exhibits, which the Company
agrees to furnish supplementally to the Commission upon
request).
4.3** Shareholders' Agreement dated as of July 8, 1996 among Bruce
H. Lipnick, Arnold L. Mintz, AJG Financial Services, Inc.,
Arthur J. Gallagher & Co. and the Company.
4.4** Registration Rights Agreement dated as of February 27, 1998
by and among the Company, John I. Bloomberg, Robert M.
Poole, Daniel P. Wimsatt, Richard Hornbuckle and Steven
Brase.
4.5** Registration and Tag Along Rights Agreement dated as of
October 1, 1996 among the Company, Trust Advisory Group,
Inc., Arnold L. Mintz and Bruce H. Lipnick.
4.6** Registration Rights Agreement dated as of March 11, 1997
among the Company, Silverado Capital Management LLC and
Jeffrey Cohen.
4.7** Registration Rights Agreement dated as of April 28, 1998 by
and among the Company, JMG Capital Management, Inc., Pacific
Capital Management, Inc., Jonathan M. Glaser, Roger Richter
and Daniel A. David.
4.8** Form of Asset Alliance Corporation Subscription Agreement.
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
4.9** Form of Asset Alliance Corporation Redeemable Common Stock
Purchase Warrant.
4.10** Asset Alliance Corporation Convertible Subordinated
Debenture due June 30, 2001 held by Trust Advisory Group,
Inc.
4.11** Form of Asset Alliance Corporation Subordinated Debenture
held by stockholders of Bricoleur Capital Management Inc.
4.12** Form of Asset Alliance Corporation Adjustable Rate
Subordinated Convertible Debenture issued to investors in
Asset Alliance Preferred Manager Trust LLC.
4.13** Form of Asset Alliance Corporation Series A Subordinated
Convertible Debenture due April 30, 2003 issued in
connection with the Company's investment in JMG Capital
Management LLC and Pacific Assets Management LLC.
4.14** Form of Asset Alliance Corporation Series B Subordinated
Convertible Debenture due April 30, 2003 issued in
connection with the Company's investment in JMG Capital
Management LLC and Pacific Assets Management LLC.
4.15** Form of Asset Alliance Corporation Subordinated Convertible
Debenture to be issued in connection with the Company's
investment in Metropolitan Capital Managers LLC,
Metropolitan Capital Managers II LLC and Metropolitan
Capital Advisors LLC.
4.16** Form of Registration Rights Agreement to be executed in
connection with the Company's investment in Metropolitan
Capital Managers LLC, Metropolitan Capital Managers II LLC
and Metropolitan Capital Advisors LLC.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to
the legality of the securities being offered.
10.1**+ Bricoleur Capital Management LLC Limited Liability Company
Agreement dated February 27, 1998 by and among Asset
Alliance Management Corp., Asset Alliance Bricoleur Merger
Co. and the signatories thereto (excluding schedules and
exhibits, which the Company agrees to furnish supplementally
to the Commission upon request).
10.2** Milestone Global Advisors L.P. Amended and Restated Limited
Partnership Agreement dated June 28, 1996 by Milestone Fund
Manager Inc. and Milestone Investment Group Inc. (excluding
schedules and exhibits, which the Company agrees to furnish
supplementally to the Commission upon request).
10.3** JMG Capital Management LLC Limited Liability Company
Agreement dated April 28, 1998 by and among Asset Alliance
Management Corp., Asset Alliance Holding Corp. and the
signatories thereto (excluding schedules and exhibits, which
the Company agrees to furnish supplementally to the
Commission upon request).
10.8** Asset Alliance Corporation 1996 Stock Option Plan, as
amended by Amendment No. 1 thereto on January 23, 1998.
10.9** Building Lease between the Company and Joseph P. Day Realty
Corp. dated September 12, 1996.
10.10** Building Lease Modification Agreement between the Company
and Joseph P. Day Realty Corp. dated December 8, 1997.
10.11** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Bruce H. Lipnick.
10.12** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Arnold L. Mintz.
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
10.13** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and Mark P. Strauch.
10.14** Amended and Restated Employment Agreement dated as of March
4, 1998 between the Company and David R. Long.
10.15** Employment Agreement dated as of March 12, 1998 between the
Company and Jeffrey J. Ervine.
21 Schedule of Subsidiaries of the Company.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Peterson & Co.
24** Powers of Attorney (set forth on the signature page to this
Registration Statement).
27.1** Financial Data Schedule as of and for the year ended
December 31, 1998.
27.2** Financial Data Schedule as of and for the three months ended
March 31, 1998
99.1** Consent of Jefferson F. Allen.
99.2** Consent of Harvey Silverman.
</TABLE>
- ---------------
** Previously filed.
+ Certain portions of this Exhibit have been omitted pursuant to a confidential
treatment request filed with the Commission. The omitted portions have been
filed separately with the Commission.
<PAGE> 1
EXHIBIT 1.1
7,700,000 SHARES OF COMMON STOCK
ASSET ALLIANCE CORPORATION
FORM OF UNDERWRITING AGREEMENT
June ___, 1998
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
Asset Alliance Corporation, a corporation organized and
existing under the laws of Delaware (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
7,700,00 shares (the "Firm Shares") of its common stock, par value $.01 per
share (the "Common Stock") and, for the sole purpose of covering over-allotments
in connection with the sale of the Firm Shares, at the option of the
Underwriters, up to an additional 1,155,000 shares (the "Additional Shares") of
Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares." The Shares are more fully
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and may have
filed an amendment or amendments thereto, on Form S-1 (No. 333-48723), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the
<PAGE> 2
prospectus, financial statements and schedules, exhibits and all other documents
filed as a part thereof, as amended at the time of effectiveness of the
registration statement, including any information deemed to be a part thereof as
of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434
of the Rules and Regulations of the Commission under the Act (the
"Regulations"), and any additional registration statement increasing the size of
the offering filed pursuant to Rule 462(b) of the Regulations with respect to
the Shares ("Rule 462(b) Registration Statement"), is herein called the
"Registration Statement" and the prospectus, in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations or filed as part of the
Registration Statement at the time of effectiveness if no Rule 424(b) or Rule
434 filing is required, is herein called the "Prospectus." The term "preliminary
prospectus" as used herein means a preliminary prospectus as described in Rule
430 of the Regulations.
(b) At the time of the effectiveness of the
Registration Statement or the effectiveness of any post-effective amendment to
the Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the Prospectus is filed with the Commission and at
the Closing Date and the Additional Closing Date, if any (as hereinafter
respectively defined), the Registration Statement and the Prospectus and any
amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations
and does not or will not contain an untrue statement of a material fact and does
not or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in the light of the circumstances under which they were made, not misleading.
When any related preliminary prospectus was first filed with the Commission
(whether filed as part of the registration statement for the registration of the
Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations)
and when any amendment thereof or supplement thereto was first filed with the
Commission, such preliminary prospectus and any amendments thereof and
supplements thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and did not contain an untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through Bear, Stearns & Co. Inc. as herein stated expressly for use
in connection with the preparation thereof. Any [term sheet and] prospectus
subject to completion provided by the Company to the Underwriters for use in
connection with the offering and sale of the Shares pursuant to Rule 434 of the
Regulations together are not materially different from the last preliminary
prospectus included in the Registration Statement prior to the time of its
effectiveness (exclusive of any information deemed to be a part thereof by
virtue of Rule 434(d) of the Regulations).
-2-
<PAGE> 3
(c) Ernst & Young LLP, who have certified the
financial statements and supporting schedules included in the Registration
Statement (other than the financial statements and supporting schedules of
Bricoleur Capital Management, Inc.), and Peterson & Co., who have who have
certified the financial statements and supporting schedules of Bricoleur Capital
Management, Inc. included in the Registration Statement, are each independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance sheet
presented in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company and its
subsidiaries, taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated
herein have been duly and validly authorized by the Company and this Agreement
has been duly and validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement, instrument,
franchise, license or permit to which the Company or any of its subsidiaries is
a party or by which any of such entities or their respective properties or
assets may be bound or (ii) violate or conflict with any provision of the
certificate of incorporation or by-laws of the Company or the constituting or
organizational documents of any of its subsidiaries or any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets is required for the execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the Shares to
be issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws or
-3-
<PAGE> 4
by the National Association of Securities Dealers, Inc. in connection with the
purchase and distribution of the Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock are
duly and validly authorized and issued, fully paid and nonassessable and were
not issued and are not now in violation of or subject to any preemptive or
similar rights. The Shares, when issued, delivered and sold in accordance with
this Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or be subject to
any preemptive or similar rights. The Company had, at March 31, 1998, an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus in the column entitled "Actual" under the caption
"Capitalization." The Common Stock and the Shares conform to the descriptions
thereof contained in the Registration Statement and the Prospectus.
(h) Schedule II attached hereto sets forth a true,
complete and correct list of (i) the names of the Company's subsidiaries, (ii)
the legal classification of each such subsidiary (i.e., corporation, limited
partnership, general partnership or limited liability company) and (iii) the
percentage of shares of issued capital stock, partnership interests or
membership interests, as the case may be, of each such subsidiary owned by the
Company. All of the shares of issued capital stock, partnership interests or
membership interests, as the case may be, of each subsidiary as set forth on
Schedule II hereto, are owned directly or indirectly by the Company, free and
clear of any lien, encumbrance, claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect of title
whatsoever, except for liens under the Credit Agreement (as defined in the
Prospectus) and liens contemplated by the New Credit Facility (as defined in the
Prospectus), each as described in the Prospectus.
(i) All of the issued shares of capital stock of each
subsidiary of the Company which is a corporation have been duly and validly
authorized and issued, fully paid and nonassessable and were not issued in
violation of any preemptive or similar rights. All of the partnership interests
or membership interests, as the case may be, of each subsidiary of the Company
which is a limited partnership, general partnership or limited liability company
have been duly and validly issued in accordance with the partnership agreement
or limited liability agreement, as applicable, of such subsidiary, and were not
issued in violation of any preemptive or similar rights. Each subsidiary of the
Company is a "majority-owned subsidiary" as such term is defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act").
(j) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material adverse
effect on the Company and its subsidiaries, taken as a whole. Each subsidiary of
the Company and each of (i) Metropolitan Capital Managers LLC, (ii) Metropolitan
Capital Managers II LLC and (iii) Metropolitan Capital
-4-
<PAGE> 5
Advisors LLC (the entities referred to in (i) - (iii) being collectively
referred to herein as the "MET Entities") has been duly organized or formed and
is validly existing as a corporation, limited partnership, limited liability
company or general partnership, as the case may be, in good standing under the
laws of its jurisdiction of organization or formation. Each subsidiary of the
Company and each MET Entity that is a corporation, limited partnership, limited
liability company or general partnership, as the case may be, is duly qualified
and in good standing as a foreign corporation, limited partnership, limited
liability company or general partnership in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the Company, its subsidiaries and
the MET Entities, taken as a whole. Each of the Company, its subsidiaries and,
to the knowledge of the Company, the MET Entities has all requisite power and
authority, and all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus, except in each case where the
failure to have such consent, approval, authorization, order, registration,
qualification, license or permit will not in the aggregate have a material
adverse effect on the Company, its subsidiaries and the MET Entities, taken as a
whole, and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome restriction
not adequately disclosed in the Registration Statement and the Prospectus.
(k) Except as described in the Prospectus, there is
no litigation or governmental proceeding to which the Company, any of its
subsidiaries or, to the knowledge of the Company, the MET Entities is a party or
to which any property of the Company, any of its subsidiaries or the MET
Entities is subject or which is pending or, to the knowledge of the Company,
contemplated against the Company, any of its subsidiaries or the MET Entities
which might result in any material adverse change or any development involving a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company, its
subsidiaries and the MET Entities, taken as a whole, or which is required to be
disclosed in the Registration Statement and the Prospectus.
(l) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(m) The financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and the
Prospectus present fairly, in all material respects, the financial position of
the Company and its consolidated subsidiaries on a consolidated basis and (as to
financial statements and related notes included in the Registration Statement
and the Prospectus pursuant to Rule 3-05 of Regulation S-X) the financial
position of (1) Bricoleur Capital Management, Inc. (2) JMG Capital Management,
Inc. and Pacific Capital
-5-
<PAGE> 6
Management, Inc., (3) the MET Entities and (4) Trust Advisors LLC, as of the
respective dates indicated and the results of its operations for the respective
periods specified; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; the pro forma
financial information included in the Registration Statement and the Prospectus
has been prepared in conformity with the applicable published rules and
regulations of the Commission with respect to pro forma financial information,
all adjustments have been properly applied and the assumptions used in preparing
such information are reasonable; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules of the Company, its
subsidiaries, the MET Entities or any other entity are required by the Act or
the Regulations to be included in the Registration Statement or the Prospectus.
(n) None of the Company, any of its subsidiaries or,
to the knowledge of the Company, the MET Entities is in (i) violation of its
certificate of incorporation or by-laws or other constituting or organizational
documents as in effect on the date hereof or (ii) default (nor has any event
occurred which, with notice or lapse of time or both, would constitute a
default) under any provisions of any agreement, instrument, franchise, license
or permit to which the Company, any of its subsidiaries or the MET Entities is a
party or by which any of such entities or their respective properties or assets
may be bound, where such default could have a material adverse effect on the
business, prospects, properties, operations, condition (financial or other) or
results of operations of the Company, its subsidiaries and the MET Entities,
taken as a whole.
(o) None of the Company, any of its subsidiaries or,
to the knowledge of the Company, the MET Entities owns any real property; the
Company, its subsidiaries and, to the knowledge of the Company, the MET Entities
have good and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus (including such liens under the Credit Agreement and
liens contemplated by the New Credit Facility) or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company, its subsidiaries and the
MET Entities; and any real property, buildings and personal property held under
lease by the Company, its subsidiaries and, to the knowledge of the Company, the
MET Entities are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use
thereof made and proposed to be made by the Company, its subsidiaries and the
MET Entities.
(p) The Company, its subsidiaries and, to the
knowledge of the Company, the MET Entities have filed all foreign, federal,
state and local tax returns that are required to be filed or has requested
extensions thereof and have paid all taxes required to be paid by them and any
other assessment, fine or penalty levied against them, to the extent that any of
the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith.
-6-
<PAGE> 7
(q) Except as described in the Prospectus, no holder
of securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
(r) To the extent such registration is required, each
of the Company's subsidiaries and each of the MET Entities has been duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), or under state law, and each such registration
is in full force and effect; the Company is not required to register as an
"investment adviser" under the Advisers Act and the rules and regulations of the
Commission promulgated thereunder or under state law; and none of the Company,
any of its subsidiaries or, to the knowledge of the Company, any of the MET
Entities, is and, after giving effect to the offering and sale of the Shares,
none will be, an "investment company" or an entity "controlled" by an
"investment company," as such terms are defined in the Investment Company Act.
(s) The Company is not party to any investment
advisory agreement or distribution agreement and is not serving or acting as an
investment adviser to any person. Each of the investment advisory agreements to
which any of the Company's subsidiaries or a MET Entity is a party is a legal,
valid and binding obligation of such subsidiary or MET Entity, as applicable,
and, to the extent subject thereto, complies with the applicable requirements of
the Advisers Act and the rules and regulations of the Commission thereunder
and/or applicable state law, and no such agreement that was either in effect on
December 31, 1997 or entered into by a subsidiary or a MET Entity since December
31, 1997 has been terminated or expired, except where the failure to so comply
or any termination or expiration would not, individually or in the aggregate,
have a material adverse effect on the Company, its subsidiaries and the MET
Entities, taken as a whole; none of such subsidiaries or MET Entities is in
breach or violation of or in default under any such agreement with such
exceptions individually or in the aggregate as would not have a material adverse
effect on the Company, its subsidiaries and the MET Entities, taken as a whole.
No subsidiary of the Company and, to the knowledge of the Company, no MET Entity
is serving or acting as an investment adviser to any person except pursuant to
an agreement to which such subsidiary or MET Entity is a party and which is in
full force and effect, other than any agreements the non-existence of which
would not, individually or in the aggregate, have a material adverse effect on
the Company, its subsidiaries and the MET Entities, taken as a whole.
-7-
<PAGE> 8
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters and
the Underwriters, severally and not jointly, agree to purchase from the Company,
at a purchase price per share of $_______, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto plus any
additional number of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery
of certificates for, the Shares shall be made at the offices of Stroock &
Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, or at such other
place as shall be agreed upon by you and the Company, at 10:00 a.m., New York
time, on the third or fourth business day (as permitted under Rule 15c6-1 under
the Exchange Act) (unless postponed in accordance with the provisions of Section
9 hereof) following the date of the effectiveness of the Registration Statement
(or, if the Company has elected to rely upon Rule 430A of the Regulations, the
third or fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act) after the determination of the initial public offering price of the
Shares), or such other time not later than ten business days after such date as
shall be agreed upon by you and the Company (such time and date of payment and
delivery being herein called the "Closing Date"). Payment shall be made to the
Company by wire transfer in same day funds, against delivery to you for the
respective accounts of the Underwriters of certificates for the Shares to be
purchased by them. Certificates for the Shares shall be registered in such name
or names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company will permit
you to examine and package such certificates for delivery at least one full
business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the
Underwriters the option to purchase up to 1,155,000 Additional Shares at the
same purchase price per share to be paid by the Underwriters to the Company for
the Firm Shares as set forth in this Section 2, for the sole purpose of covering
over-allotments in the sale of Firm Shares by the Underwriters. This option may
be exercised at any time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine
-8-
<PAGE> 9
and package such certificates for delivery at least one full business day prior
to the Additional Closing Date.
The number of Additional Shares to be sold to each
Underwriter shall be the number which bears the same ratio to the aggregate
number of Additional Shares being purchased as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to 7,700,000, subject,
however, to such adjustments to eliminate any fractional shares as you in your
sole discretion shall make.
Payment for the Additional Shares shall be made by
wire transfer in same day funds at the offices of Stroock & Stroock & Lavan LLP,
180 Maiden Lane, New York, New York 10038, or such other location as may be
mutually acceptable, upon delivery of the certificates for the Additional Shares
to you for the respective accounts of the Underwriters.
3. Offering. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus. You represent that you are authorized to
execute and deliver this Agreement on behalf of the several Underwriters named
in Schedule I hereto.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) If the Registration Statement has not yet been
declared effective the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on Rule
434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
The Company will notify you immediately (and, if
requested by you, will confirm such notice in writing) (i) when the Registration
Statement and any amendments thereto become effective, (ii) of any request by
the Commission for any amendment of or supplement to the Registration Statement
or the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every
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<PAGE> 10
reasonable effort to prevent the issuance of any such stop order and, if issued,
to obtain the lifting of such order as soon as possible. The Company will not
file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the
Shares is required to be delivered under the Act any event shall have occurred
as a result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two
signed copies of the Registration Statement, including exhibits and all
amendments thereto, and the Company will promptly deliver to each of the
Underwriters such number of copies of any preliminary prospectus, the
Prospectus, the Registration Statement, and all amendments of and supplements to
such documents as you may reasonably request.
(d) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time of effectiveness of the
Registration Statement, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no event
shall the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within
the meaning of Section 11(a) of the Act) to its security holders and to you as
soon as practicable, but not later than 45 days after the end of its fiscal
quarter in which the first anniversary date of the effective date of the
Registration Statement occurs, an earning statement (in form complying with the
provisions of Rule 158 of the Regulations) covering a period of at least twelve
consecutive months beginning after the effective date of the Registration
Statement.
(f) If the Company elects to rely on Rule 462(b) of
the Regulations, the Company shall both file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m., New
York time, on the date of this Agreement, and the Company
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<PAGE> 11
shall at the time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) of the Regulations.
(g) During the period of 270 days from the date of
the Prospectus, the Company will not, without the prior written consent of Bear,
Stearns & Co. Inc., on behalf of the Underwriters, issue, sell, offer or agree
to sell, grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any Common Stock (or any securities convertible into, exercisable
for or exchangeable for Common Stock), and the Company will obtain the
undertaking of all of its stockholders and each of its officers and directors
not to engage in any of the aforementioned transactions on their own behalf,
other than (i) the Company's sale of Shares hereunder, (ii) the Company's
issuance of Common Stock upon the exercise of presently outstanding stock
options and warrants or upon the conversion or exchange of presently outstanding
convertible or exchangeable securities, (iii) the issuance of options to acquire
shares of Common Stock pursuant to employee stock option plans existing on the
date of this Agreement and (iv) the Company's issuance of shares of Common Stock
or such other securities as consideration in the MET Acquisition (as defined in
the Prospectus) and any future investments or acquisitions to be made by the
Company or any of its subsidiaries, provided that such Common Stock or other
securities are made subject to the same 270 day restriction.
(h) During a period of three years from the effective
date of the Registration Statement, the Company will furnish to you copies of
(i) all reports to its stockholders; and (ii) all reports, financial statements
and proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(i) The Company will apply the proceeds from the sale
of the Shares as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to cause
the Shares to be listed on the Nasdaq National Market.
(k) The Company will file with the Commission such
reports as may be required pursuant to Rule 463 of the Regulations.
5. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's accountants and counsel), any Rule 462(b) Registration
Statement, and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as hereinabove
stated), (ii) the issuance, transfer and delivery of the Shares to the
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<PAGE> 12
Underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the Shares under state or foreign securities or Blue Sky laws,
including the costs of printing and mailing a preliminary and final "Blue Sky
Survey" and the fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) listing the Shares on the Nasdaq
National Market, (v) the filing fees of the Commission and NASD Regulation,
Inc., (vi) the cost of printing certificates representing the Shares and (vii)
the cost and charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of
the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date"
shall refer to the Closing Date for the Firm Shares and any Additional Closing
Date, if different, for the Additional Shares), to the absence from any
certificates, opinions, written statements or letters furnished to you or to
Stroock & Stroock & Lavan LLP ("Underwriters' Counsel") pursuant to this Section
6 of any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 4:00 p.m., New York time, on the date of this
Agreement, or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely upon Rule 430A or Rule
434 of the Regulations, the Prospectus shall have been filed with the Commission
in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel.
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<PAGE> 13
(c) All proceedings taken in connection with the sale
of the Firm Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(d) At the Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a material
adverse change, in the business, prospects, properties, operations, condition
(financial or otherwise), or results of operations of the Company and its
subsidiaries, taken as a whole, except in each case as described in or
contemplated by the Prospectus.
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<PAGE> 14
(e) At the time this Agreement is executed and at the
Closing Date, you shall have received a letter, from Ernst & Young LLP, dated,
respectively, as of the date of this Agreement and as of the Closing Date
addressed to the Underwriters and in form and substance satisfactory to you, to
the effect that: (i) they are independent certified public accountants with
respect to each of (1) the Company and its consolidated subsidiaries, (2) JMG
Capital Management, Inc. and Pacific Capital Management, Inc., (3) the MET
Entities and (4) Trust Advisors LLC, within the meaning of the Act and the
Regulations and stating that the answer to Item 10 of the Registration Statement
is correct insofar as it relates to them; (ii) stating that, in their opinion,
the financial statements and schedules included in the Registration Statement
and the Prospectus and covered by their opinions therein comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations; (iii) they consent to the use of their report concerning the
financial statements in the Prospectus and to all references to such accountants
therein, including their designation as experts under the caption "Experts"
therein; (iv) on the basis of (x) their limited review in accordance with
standards established by the American Institute of Certified Public Accountants
of any interim unaudited consolidated condensed financial statements of (1) the
Company and its consolidated subsidiaries, (2) JMG Capital Management, Inc. and
Pacific Capital Management, Inc., (3) the MET Entities and (4) Trust Advisors
LLC as indicated in their reports included in the Registration Statement and the
Prospectus and (y) certain specified procedures performed on the unaudited
condensed consolidated balance sheet as of March 31, 1998 and the unaudited
condensed consolidated statements of operations and of cash flows for the three
months ended March 31, 1998 and 1997 (1) the Company and its consolidated
subsidiaries, (2) JMG Capital Management, Inc. and Pacific Capital Management,
Inc., (3) the MET Entities and (4) Trust Advisors LLC included in the
Registration Statement and inquiries of officers and other employees of (1) the
Company and its consolidated subsidiaries, (2) JMG Capital Management, Inc. and
Pacific Capital Management, Inc., (3) the MET Entities and (4) Trust Advisors
LLC who have responsibility for financial and accounting matters of such
entities, nothing has come to their attention that would cause them to believe
that (A) such unaudited consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Regulations or (B) any material modifications should be made to such
unaudited consolidated financial statements for them to be in conformity with
generally accepted accounting principles; (v) on the basis of procedures (but
not an examination made in accordance with generally accepted auditing
standards) consisting of a reading of the latest available unaudited interim
consolidated financial statements of (1) the Company and its consolidated
subsidiaries, (2) JMG Capital Management, Inc. and Pacific Capital Management,
Inc., (3) the MET Entities and (4) Trust Advisors LLC, a reading of the minutes
of meetings and consents of the stockholders and boards of directors of such
entities and the committees of such boards subsequent to March 31, 1998,
inquiries of officers and other employees of the such entities who have
responsibility for financial and accounting matters of such entities with
respect to transactions and events subsequent to March 31, 1998 and other
specified procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that would cause
them to believe that: (A) with respect to the period subsequent to March 31,
1998, there were, as of the date of the most recent available monthly
consolidated financial statements of (1) the Company and its consolidated
subsidiaries, (2) JMG Capital Management, Inc. and Pacific Capital Management,
Inc., (3) the MET Entities and (4)
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<PAGE> 15
Trust Advisors LLC, if any, and as of a specified date not more than five days
prior to the date of such letter, any changes in the capital stock or increases
in long-term indebtedness of the relevant entity or entities or any decrease in
the net current assets or stockholders'/members' equity or partners' capital, as
the case may be, of such entities, in each case as compared with the amounts
shown in the most recent balance sheet of such entities presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; or (B) that during the period from
March 31, 1998 to the date of the most recent available monthly consolidated
financial statements of (1) the Company and its consolidated subsidiaries, (2)
JMG Capital Management, Inc. and Pacific Capital Management, Inc., (3) the MET
Entities and (4) Trust Advisors LLC, if any, and to a specified date not more
than five days prior to the date of such letter, there was any decreases, as
compared with the corresponding period in the prior fiscal year, in total
revenues, or total or, if applicable, per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; (vi) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company, its
subsidiaries (other than Bricoleur) and the MET Entities set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company, its subsidiaries (other than Bricoleur) and
the MET Entities or from schedules furnished by the Company, its subsidiaries
(other than Bricoleur) and the MET Entities, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement;
and (vii) on the basis of a reading of the unaudited pro forma consolidated
condensed financial statements included in the Registration Statement and
Prospectus, carrying out certain specified procedures that would not necessarily
reveal matters of significance with respect to the comments set forth in this
paragraph (vii), inquiries of certain officials of the Company and its
consolidated subsidiaries who have responsibility for financial and accounting
matters and proving the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited pro forma consolidated
condensed financial statements, nothing came to their attention that caused them
to believe that the unaudited pro forma consolidated condensed financial
statements do not comply in form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilations of such statements.
(f) At the time this Agreement is executed and at the
Closing Date, you shall have received a letter, from Peterson & Co., dated,
respectively, as of the date of this Agreement and as of the Closing Date
addressed to the Underwriters and in form and substance satisfactory to you, to
the effect that: (i) they are independent certified public accountants with
respect to Bricoleur Capital Management, Inc. within the meaning of the Act and
the Regulations and stating that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) stating that, in their
opinion, the financial statements and schedules included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
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<PAGE> 16
form in all material respects with the applicable accounting requirements of the
Act and the Regulations; (iii) they consent to the use of their report
concerning the financial statements in the Prospectus and to all references to
such accountants therein, including their designation as experts under the
caption "Experts" therein; (iv) on the basis of (x) their limited review in
accordance with standards established by the American Institute of Certified
Public Accountants of any interim unaudited consolidated condensed financial
statements of Bricoleur Capital Management, LLC, successor of Bricoleur Capital
Management, Inc., as indicated in their report included in the Registration
Statement and the Prospectus and (y) certain specified procedures performed on
the unaudited condensed balance sheet as of March 31, 1998 and the unaudited
condensed statements of operations and of cash flows for the three months ended
March 31, 1998 and 1997 Bricoleur Capital Management, LLC included in the
Registration Statement and inquiries of officers and other employees of
Bricoleur Capital Management, LLC who have responsibility for financial and
accounting matters of Bricoleur Capital Management, LLC, nothing has come to
their attention that would cause them to believe that (A) such unaudited
financial statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Regulations or (B) any
material modifications should be made to such unaudited financial statements for
them to be in conformity with generally accepted accounting principles; (v) on
the basis of procedures (but not an examination made in accordance with
generally accepted auditing standards) consisting of a reading of the latest
available unaudited interim consolidated financial statements of Bricoleur
Capital Management, LLC, a reading of the minutes of meetings and consents of
the stockholders and boards of directors of such entities and the committees of
such boards subsequent to March 31, 1998, inquiries of officers and other
employees of the such entities who have responsibility for financial and
accounting matters of such entities with respect to transactions and events
subsequent to March 31, 1998 and other specified procedures and inquiries to a
date not more than five days prior to the date of such letter, nothing has come
to their attention that would cause them to believe that: (A) with respect to
the period subsequent to March 31, 1998, there were, as of the date of the most
recent available monthly consolidated financial statements of Bricoleur Capital
Management, LLC, if any, and as of a specified date not more than five days
prior to the date of such letter, any changes in the capitalization or increases
in long-term indebtedness of Bricoleur Capital Management, LLC or any decrease
in the net current assets or members' equity of Bricoleur Capital Management,
LLC, in each case as compared with the amounts shown in the most recent balance
sheet of Bricoleur Capital Management, LLC presented in the Registration
Statement and the Prospectus, except for changes or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; or (B) that during the period from March 31,
1998 to the date of the most recent available monthly consolidated financial
statements of Bricoleur Capital Management, LLC, if any, and to a specified date
not more than five days prior to the date of such letter, there was any
decreases, as compared with the corresponding period in the prior fiscal year,
in total revenues, or total net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; and (vi) stating that they have compared
specific dollar amounts and other financial information pertaining to the
Bricoleur Capital Management, LLC set forth in the Registration Statement and
the Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts and information may be derived from
the general accounting and financial records of
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<PAGE> 17
Bricoleur Capital Management, LLC or from schedules furnished by Bricoleur
Capital Management, LLC, and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries, and other appropriate procedures specified by you set forth
in such letter, and found them to be in agreement.
(g) Prior to the Closing Date, the Company shall have
furnished to you such further information, certificates and documents as you may
reasonably request.
(h) You shall have received from all of the
stockholders of the Company and each person who is a director or officer of the
Company an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of Bear, Stearns & Co. Inc.,
subject to certain limited exceptions, offer, sell, offer or agree to sell,
grant any option to purchase or otherwise dispose (or announce any offer, sale,
grant of an option to purchase or other disposition) of any shares of Common
Stock (or any securities convertible into, exercisable for or exchangeable or
exercisable for shares of Common Stock) for a period of 270 days after the date
of the Prospectus.
(i) At the Closing Date, the Shares shall have been
approved for listing on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone or facsimile transmission, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including, but
limited to, attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of
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<PAGE> 18
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent but only to the
extent that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
Bear, Stearns & Co. Inc. expressly for use therein; and provided, further, that
this indemnity agreement with respect to any preliminary prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, liabilities, claims, damages or expenses purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any such amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if such is required by law, at or prior to the written
confirmation of the sale of such Shares to such person and if the Prospectus (as
so amended or supplemented) would have corrected the defect giving rise to such
loss, liability, claim, damage or expense. This indemnity agreement will be in
addition to any liability which the Company may otherwise have including under
this Agreement.
(b) Each Underwriter severally, and not jointly,
agrees to indemnify and hold harmless the Company, each of the directors of the
Company, each of the officers of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any losses, liabilities, claims, damages and expenses whatsoever as
incurred (including, but not limited to, attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through Bear,
Stearns & Co. Inc. expressly for use therein; provided, however, that in no case
shall any Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements
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<PAGE> 19
set forth in the third and seventh paragraphs under the caption "Underwriting"
in the Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter through Bear, Stearns & Co. Inc. expressly for use in
the registration statement relating to the Shares as originally filed or in any
amendment thereof, any related preliminary prospectus or the Prospectus or in
any amendment thereof or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent it has
been materially prejudiced by such failure). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the
-19-
<PAGE> 20
Company and one or more of the Underwriters may be subject, in such proportions
as is appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and of the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8 and the preceding sentence, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 8. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
-20-
<PAGE> 21
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default
in its or their obligation to purchase Firm Shares or Additional Shares
hereunder, and if the Firm Shares or Additional Shares with respect to which
such default relates do not (after giving effect to arrangements, if any, made
by you pursuant to subsection (b) below) exceed in the aggregate 10% of the
number of Firm Shares or Additional Shares, as the case may be, which all
Underwriters have agreed to purchase hereunder, then such Firm Shares or
Additional Shares to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more
than 10% of the Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within five business
days after such a default you do not arrange for the purchase of the Firm Shares
or Additional Shares, as the case may be, to which such default relates as
provided in this Section 9, this Agreement or, in the case of a default with
respect to the Additional Shares, the obligations of the Underwriters to
purchase and of the Company to sell the Additional Shares, shall thereupon
terminate, without liability on the part of the Company with respect thereto
(except in each case as provided in Section 5, 7(a) and 8 hereof) or the
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their default
hereunder.
(c) In the event that the Firm Shares or Additional
Shares to which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be, for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Underwriters and
the Company contained in this Agreement, including the agreements contained in
Section 5, the indemnity agreements contained in Section 7 and the contribution
agreements contained in Section 8, shall remain
-21-
<PAGE> 22
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company, any of its officers and directors or any controlling
person thereof, and shall survive delivery of and payment for the Shares to and
by the Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Section 9 or 11
hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the
later of when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 p.m., New York time, on the fifth
full business day after the Registration Statement shall have become effective,
this Agreement shall thereupon terminate without liability to the Company or the
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated by the Company by notifying you or
by you notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if (i) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (ii) if trading on the New
York or American Stock Exchange shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York or American Stock Exchange
by the New York or American Stock Exchange or by order of the Commission or any
other governmental authority having jurisdiction; or (iii) if a banking
moratorium has been declared by a state or federal authority or if any new
restriction materially adversely affecting the distribution of the Firm Shares
or the Additional Shares, as the case may be, shall have become effective; or
(iv) (A) if the United States becomes engaged in hostilities or there is an
escalation of hostilities involving the United States or there is a declaration
of a national emergency or war by the United States or (B) if there shall have
been such change in political, financial or economic conditions if the effect of
any such event in (A) or (B) as in your judgment makes it impracticable or
inadvisable to proceed with the offering, sale and delivery of the Firm Shares
or the Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this
Section 11 shall be by telephone or facsimile transmission, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to
any of the provisions hereof (otherwise than pursuant to Section 9(b) hereof),
or if the sale of the Shares
-22-
<PAGE> 23
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth herein is not satisfied or because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or comply with any provision hereof, the Company will, subject to demand by you,
reimburse the Underwriters for all out-of-pocket expenses (including the fees
and expenses of their counsel), incurred by the Underwriters in connection
herewith.
12. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or sent by facsimile transmission and
confirmed in writing, to such Underwriter, c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167, Attention: _____________, Facsimile No.
(212) 272-_____, with a copy to Stroock & Stroock & Lavan LLP, 180 Maiden Lane,
New York, New York 10038-4982, Attention: Stuart H. Coleman, Esq., Facsimile No.
(212) 806-6006; if sent to the Company, shall be mailed, delivered, or
telegraphed and confirmed in writing to the Company, 800 Third Avenue, New York,
New York 10022, Attention: Arnold L. Mintz, Executive Vice President, Facsimile
No. (212) 207-8785, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 919
Third Avenue, New York, New York 10022, Attention: Richard T. Prins, Esq.,
Facsimile No. (212) 735-2000.
13. Parties. This Agreement shall insure solely to the benefit
of, and shall be binding upon, the Underwriters and the Company and the
controlling persons, directors, officers, employees and agents referred to in
Sections 7 and 8, and their respective successors and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision
herein contained. The term "successors and assigns" shall not include a
purchaser, in its capacity as such, of Shares from any of the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
-23-
<PAGE> 24
If the foregoing correctly sets forth the understanding
between you and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ASSET ALLIANCE CORPORATION
By:______________________________
Name:
Title:
Accepted as of the date first above written:
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
By: BEAR, STEARNS & CO. INC.
By:______________________________________
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
-24-
<PAGE> 25
SCHEDULE I
Underwriters
<TABLE>
<CAPTION>
Name of Underwriter Number of Firm Shares to be Purchased
------------------- -------------------------------------
<S> <C>
Bear, Stearns & Co. Inc.
PaineWebber Incorporated
Prudential Securities Incorporated
---------
Total 7,700,000
=========
</TABLE>
-25-
<PAGE> 26
SCHEDULE II
<TABLE>
<CAPTION>
Name of Subsidiary Legal Classification Percentage Ownership
- ------------------ -------------------- --------------------
<S> <C> <C>
Asset Alliance Holding Corp. Corporation 100%
Asset Alliance Advisors Inc. Corporation 100%*
Asset Alliance Investment Services Inc. Corporation 100%*
Asset Alliance Management Corp. Corporation 100%*
Milestone Investment Group Inc. Corporation 100%*
Asset Alliance Bricoleur Merger Co. Inc. Corporation 100%
Milestone Global Advisors L.P. Limited Partnership 99%
(limited partnership interest)**
Trust Advisors LLC Limited Liability Company 50%*
Silverado Capital Management LLC Limited Liability Company 50%*
Bricoleur Capital Management LLC Limited Liability Company 50%***
JMG Capital Management LLC Limited Liability Company 50%*
Pacific Assets Management LLC Limited Liability Company 50%*
</TABLE>
- --------
* Ownership interest through Asset Alliance Holding Corp.
** Milestone Investment Group Inc. is the limited partner.
*** Ownership interest through Asset Alliance Bricoleur Merger Co. Inc.
-26-
<PAGE> 1
Exhibit 4.1
[Horizontally Set Certificate]
[Asset Alliance Logo]
NUMBER SHARES
ASSET ALLIANCE CORPORATION
A INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK $.01 PAR VALUE CUSIP 045412 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
________________________________________________________________________________
This Certifies That
is the owner of
________________________________________________________________________________
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
Asset Alliance Corporation
(the "Corporation") transferable on the books of the Corporation by said owner
in person or by duly authorized attorney, upon surrender of this certificate
properly endorsed. This certificate and the shares represented hereby are
issued and shall be held subject to all the provisions of the Certificate of
Incorporation and all amendments thereto, copies of which are on file at the
office of the Transfer Agent, and the holder hereof, by acceptance of this
certificate, consents to and agrees to be bound by all of said provisions. This
certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Arnold L. Mintz /s/ Bruce H. Lipnick
______________________________________ ___________________________________
EXECUTIVE VICE PRESIDENT AND SECRETARY PRESIDENT
ASSET ALLIANCE CORPORATION
CORPORATE SEAL
1996
DELAWARE
[Set on Side]
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
---------------------------------------
(NEW YORK, NEW YORK)
Transfer Agent and Registrar
By: ___________________________________
Authorized Signature
<PAGE> 2
Asset Alliance Corporation
The Corporation will furnish without charge to each stockholder who so requests
a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in UNIF GIFT MIN ACT - .......... Custodian ...........
common (Cust) (Minor)
TEN ENT - as tenants by under Uniform Gifts to Minors
the entireties Act ...........................
JT TEN - as joint tenants (State)
with right of
survivorship
and not as
tenants in
common
Additional abbreviations may also be used though not in the above list.
For Value Received _______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
___________________________________________
___________________________________________
_____________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________________ Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
___________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________
_______________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: __________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 5.1
[NY Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
June 3, 1998
ASSET ALLIANCE CORPORATION
800 Third Avenue
New York, New York 10022
Re: Asset Alliance Corporation
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Asset Alliance Corporation, a
Delaware corporation (the "Company"), in connection with the initial public
offering by the Company of an aggregate of up to 8,855,000 shares (including
1,155,000 shares subject to an over-allotment option) (the "Shares") of the
Company's common stock, par value $.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Securities Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-48723), relating to the Shares, as filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act on March 26, 1998 and Amendments Nos. 1 and 2 thereto, as filed
with the Commission on May 13, 1998 and June 3, 1998, respectively (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"); (ii) the form of the Underwriting Agreement (the
"Underwriting Agreement") proposed to be entered into among the Company, as
issuer, and Bear, Stearns & Co. Inc., PaineWebber Incorporated and Prudential
Securities Incorporated, as
<PAGE> 2
ASSET ALLIANCE CORPORATION
June 3, 1998
Page 2
representatives of the several underwriters named therein (the "Underwriters"),
filed as an exhibit to the Registration Statement; (iii) a specimen certificate
representing the Shares; (iv) the Amended and Restated Certificate of
Incorporation (the "Certificate") and the Amended and Restated By-Laws (the
"By-Laws") of the Company, filed as exhibits to the Registration statement in
the form proposed to be adopted by the Company; and (v) certain resolutions
adopted by the Board of Directors of the Company and drafts of certain
resolutions (the "Draft Resolutions") proposed to be adopted by the Offering
Committee appointed by the Board of Directors of the Company (the "Offering
Committee"), in each case relating to the issuance and sale of the Shares and
certain related matters. We have also examined originals and copies, certified
or otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies, and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate and other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate and
other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof on such parties. As to any facts material
to the opinions expressed herein which we have not independently established or
verified, we have relied upon oral or written statements and representations of
officers and other representatives of the Company and others.
Members of our firm are admitted to the Bar in the State of Delaware,
and we do not express any opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement becomes effective; (ii) the Draft
Resolutions have been adopted by the Offering Committee; (iii) the price at
which the Shares are
<PAGE> 3
ASSET ALLIANCE CORPORATION
June 3, 1998
Page 3
to be sold to the Underwriters pursuant to the Underwriting Agreement and other
matters relating to the issuance and sale of the Shares have been approved by
the Offering Committee in accordance with the Draft Resolutions; (iv) the
Underwriting Agreement has been duly executed and delivered; (v) the Certificate
and By-Laws have been adopted by the Board of Directors and stockholders of the
Company as required under Delaware law and the Articles have been filed with the
Secretary of State of Delaware, each in the form filed with the Commission on or
before the date hereof; and (vi) certificates representing the Shares in the
form of the specimen certificate examined by us have been duly executed by an
authorized officer of the transfer agent and registrar for the Common Stock and
registered by such transfer agent and registrar, and delivered to and paid for
by the Underwriters at a price per share not less than the per share par value
of the Shares as contemplated by the Underwriting Agreement, the issuance and
sale of the Shares will have been duly authorized, validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. In
giving such consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission promulgated thereunder.
This opinion is furnished by us, as your special counsel, in
connection with the filing of the Registration Statement and, except as
provided in the immediately preceding paragraph, is not to be used, circulated,
quoted or otherwise referred to for any other purpose or relied upon by any
other person without our prior written permission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE> 1
Exhibit 21
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
NAME: ORGANIZATION: OWNERSHIP:
<S> <C> <C>
Asset Alliance Holding Corp. Delaware 100%
Asset Alliance Advisors Inc. Delaware 100%*
Asset Alliance Investment Services Inc. Delaware 100%*
Asset Alliance Management Corp. Delaware 100%*
Milestone Investment Group Inc. Delaware 100%*
Asset Alliance Bricoleur Merger Co. Inc. Delaware 100%
Milestone Global Advisors L.P. Delaware 99% (Limited Partnership Interest)**
- --------------------
* Ownership interest through Asset Alliance Holding Corp.
** Milestone Investment Group Inc. Limited Partner
</TABLE>
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts", "Summary
Historical and Pro Forma Financial Data" and "Selected Historical Financial
Data", and to the use of our reports dated March 26, 1998, with respect to the
financial statements of Asset Alliance Corporation, March 26, 1998, with respect
to the combined financial statements of Metropolitan Capital Advisors, L.P.,
Metropolitan Capital Partners II, L.P. and Metropolitan Capital Partners III,
L.P., March 26, 1998, with respect to the combined financial statements of JMG
Capital Management, Inc. and Pacific Capital Management, Inc., and March 26,
1998, with respect to the financial statements of Trust Advisors LLC, included
in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-48723) and
related Prospectus of Asset Alliance Corporation dated June 3, 1998.
/s/ Ernst & Young LLP
New York, New York
June 3, 1998
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the reference of our firm under the caption "Experts" and to the
incorporation by reference in Amendment No. 2 to Form S-1, Registration
Statement Under the Securities Act of 1933, of our report dated March 12, 1998
on the financial statements of Bricoleur Capital Management, Inc. (formerly Utah
Capital Corporation) for the years ended December 31, 1997, 1996 and 1995.
/s/ Peterson & Co.
PETERSON & CO.
June 3, 1998
San Diego, California
