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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-9215
------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2714625
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 330-8900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock New York Stock Exchange
($.01 par value)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by stockholders who
are not directors or executive officers of the registrant was approximately
$1.7 billion based on the last reported sale price of the registrant's common
stock on the New York Stock Exchange composite tape on March 13, 1998.
The number of shares of common stock, par value $.01, outstanding as of
March 13, 1998 was 69,211,279.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the information called for by Parts I through IV of this report on
Form 10-K is incorporated by reference from certain portions of (a) the
Annual Report to Stockholders of the registrant for the year ended December
31, 1997, and (b) the Proxy Statement of the registrant filed pursuant to
Regulation 14A and sent to stockholders in connection with the Annual Meeting
of Stockholders to be held on May 21, 1998. Such Report and Proxy Statement,
except for the parts therein which have been specifically incorporated herein
by reference, shall not be deemed "filed" as part of this report on Form
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
United Asset Management Corporation (UAM or the Company) is a holding
company organized in December 1980 to acquire and own firms that provide
investment advisory services primarily for institutional clients. The Company's
wholly owned subsidiaries (Affiliated Firms or Firms) operate in one business
segment, that is, as investment advisers, managing both domestic and
international investment portfolios for corporate benefit plans, mutual funds,
government and union benefit plans, individuals, endowments, and foundations.
UAM intends to continue expanding through the internal growth of its present
Affiliated Firms and through the acquisition or organization of additional firms
in the future (see "Affiliated Firms"). In addition, UAM plans to continue to
diversify, domestically and internationally, with respect to both the classes of
assets managed and client base. While UAM's Affiliated Firms primarily
specialize in the management of U.S. equities, bonds and cash, other asset
classes under management include international securities, real estate and
stable value assets.
Advisory fees based on the assets of pension plans, profit sharing
plans, endowments and foundations provide the largest portion of the
Company's revenues. Such clients are sometimes referred to as
"institutional" clients, and they are generally "tax-exempt" in that the
income and any capital gains which result from their portfolio investments
are not taxable to them under present law. Advisory fees are primarily based
on the value of assets under management. Fee rates typically decline as
account size increases. The assets of institutional clients have generally
been growing, with the most rapid growth achieved by pension and profit
sharing plans (sometimes called employee benefit plans). For the year ended
December 31, 1997, no single client of any Affiliated Firm provided more than
5% of the Company's consolidated revenues. Accordingly, the loss of any
single client would not have a material adverse effect on the Company's total
investment management business.
Each Affiliated Firm operates under its own name, with its own
investment philosophy and approach. Each conducts its own investment
analysis, portfolio selection, marketing and client service. During any given
period, investment results may vary among Firms. Client fees are set by each
Firm based on its own judgment concerning the market for the services it
renders. Each Firm is separately regulated under applicable federal, state
or foreign law.
In addition to the Firms' individual efforts, UAM has established
several distribution and client service organizations which are available to
the Affiliated Firms to supplement the investment management services they
provide. This is described more fully under "Method of Operation."
UAM has revenue sharing plans with the Affiliated Firms which are
described more fully under "Revenue Sharing." These agreements provide for
UAM to receive increased or decreased revenues from each Affiliated Firm,
based on a percentage of the change in each Firm's revenues from year to
year, starting from a base amount agreed upon in the year of acquisition or
at inception. These arrangements allow each Firm to set its own operating
expense budget and compensation practices, limited by the share of revenues
available to the Firm.
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THE INDUSTRY
Revenues in the institutional investment management industry are
determined primarily by fees based on assets under management. Therefore,
the principal determinant of growth in the industry is the growth of
institutional assets under management. In management's judgment, the major
factors which influence changes in institutional assets under management are:
(a) changes in the market value of securities; (b) net cash flow into or out
of existing accounts; (c) gains of new or losses of existing accounts by
specific firms or segments of the industry; and (d) the introduction of new
products by the industry or by particular firms.
In general, assets under management in the institutional segments of the
industry have increased steadily. For example, Money Market Directories,
Inc. recorded in its 1998 Directory $4.9 trillion in assets under management
in accounts of employee benefit plans and endowments within the United
States as of mid-1997, which represents an average compound five-year annual
growth rate of 11.2% since mid-1992. The largest institutional segment of
assets under management is employee benefit plan assets. The 1998 Directory
reported $4.7 trillion of employee benefit plan assets under management as of
mid-1997, which represents an average compound five-year annual growth rate
of 11.2% since mid-1992.
The employee benefit plan market includes two principal sectors:
defined benefit and defined contribution plans. More than half of U.S.
retirement plan assets are in defined benefit plans, which assure employees
of a particular level of pension benefits when they retire. The Employee
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code
of 1986 (the Code) require employers to fund their defined benefit plans
sufficiently to generate the benefits they have promised. However, the Code
also discourages overfunding of defined benefit plans by employers by
limiting tax deductions for contributions to fully funded plans. In
management's opinion, high investment returns experienced in the 1980s and
thus far in the 1990s have resulted in many defined benefit retirement plans
reaching or exceeding their full funding limits based on actuarial
calculations; therefore, many employers have ceased to contribute additional
cash to the plans. However, if the value of plan assets declines due to
market factors, or if sustained periods of low interest rates cause an
increase in the actuarial value of plan liabilities, employers will generally
be obligated to step up contributions to their defined benefit pension plans.
This counter-cyclical funding pattern for defined benefit plans helps to
smooth out fluctuations in the growth of plan assets under management by
firms that provide investment advisory services to sponsors of defined
benefit plans, and therefore, it helps to moderate fluctuations in the
revenues of these investment managers. Under defined contribution plans, on
the other hand, employers may contribute to their employees' retirement funds
on a tax-advantaged basis, but individual employees generally decide how
their plan assets will be invested. Defined contribution plans are the
fastest growing sector of the employee benefit plan market.
The number and size of investment management firms which UAM would
consider acquiring have grown in the past five years. The 1993 Money Market
Directory showed 1,288 investment advisory firms (including branch offices)
within the United States managing $3.7 trillion as of mid-1992. The 1998
Directory showed 1,330 such firms (including branch offices) within the
United States managing approximately $9.8 trillion of assets as of mid-1997,
which represents an average compound five-year annual growth rate of 21.6%
over the corresponding assets since mid-1992.
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COMPETITION
The Affiliated Firms compete with a large number of investment
management firms, principally those engaged in the management of
institutional accounts. In addition, the Affiliated Firms compete with
affiliates of securities broker-dealers, commercial banks, insurance
companies, and other entities, many of which have substantially greater
capital and other resources and some of which offer a wider range of
financial services. Furthermore, each of the Affiliated Firms may compete
with other Affiliated Firms for clients.
Management believes that the most important factors affecting
competition in the investment management industry are the abilities and
reputations of investment managers, differences in the investment performance
of investment management firms, the development of new investment strategies,
access to channels of distribution, resources to invest in information
technologies and client service capabilities.
Barriers to entry are low, and firms are relatively long-lived in the
investment management business. A new investment management firm has low
capital requirements. Maintaining the firm requires only the continued
involvement of its professional personnel. A major portion of profits may be
regularly withdrawn because new capital commitments are limited and rarely
necessary.
With respect to the acquisition of investment management firms, UAM
competes with many other potential purchasers of these firms, including
insurance companies, banks and other investment groups. As a result of its
continuing acquisition activities, including regular contacts with potential
acquisition candidates, UAM has an extensive knowledge of the candidate
population, both domestically and internationally.
UAM'S ACQUISITION PROGRAM
Since its inception, UAM has sought to acquire or to establish
institutional investment management firms. Once it acquires or organizes
such firms, UAM seeks to preserve their autonomy by allowing their key
employees to retain control of investment decisions and manage day-to-day
operations. When an Affiliated Firm is acquired from employee-stockholders,
the former stockholders receive the added benefits of a more diversified
company by virtue of equity ownership in UAM.
UAM conducts its own acquisition activities rather than relying
primarily upon outside agents to find and develop acquisition candidates for
it. UAM's activities include regular mailing and calling programs through
which UAM seeks to contact and visit potential acquisition candidates on a
regular basis. UAM is willing to use finders to locate suitable candidates
and has paid finders' fees on four occasions. Once acquisition negotiations
begin, UAM utilizes its own staff and outside legal counsel to negotiate
price, terms and the wording of specific documents required. Typically, a
definitive purchase agreement is signed and then clients of the firm to be
acquired are contacted by principals of that firm in order to obtain the
client's consent to the assignment of its advisory contract as required by
the Investment Advisers Act of 1940. Once sufficient consents have been
received, the acquisition is completed. Consent of all of a firm's clients
has been obtained in connection with virtually all of UAM's acquisitions to
date. To complete the acquisition or organization of a non-U.S. firm,
regulatory approval may be required in the host country.
After acquisition by UAM, Affiliated Firms continue to operate under
their own firm name, with their own leadership and individual investment
philosophy and approach. UAM seeks to achieve diversity by acquiring
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investment management firms having different investment philosophies and
strategies and specializing in different asset classes. In addition, UAM has
acquired or organized firms at various stages of development, from start-up
to relatively mature firms and has acquired both employee-owned firms and
subsidiaries or divisions of financial institutions.
UAM has observed that the major reasons that employee-owned firms
consider selling to UAM include: (a) the high value of the firm relative to
its principals' total net worth; (b) the need for liquidity on the part of
the principals; (c) their desire for diversification and a reduction in their
exposure to a single firm's results; (d) their autonomy after acquisition;
and (e) increasingly, the access to channels of distribution provided by
UAM's service firms. Substantially all the key employees of Affiliated Firms
continue to be actively involved in their firms long after their acquisition
by UAM.
In purchasing investment management firms, UAM has structured the
transactions to create incentives for key personnel to remain with their firm
after the expiration of their employment agreements. The key employees have
entered into employment and noncompetition agreements for terms ranging
primarily from five to 12 years, which also prohibit the employees from
competing with their firm for a substantial period after termination of
employment. Most of the key employees of the Affiliated Firms were
stockholders of such firms prior to their acquisition by UAM. In connection
with the purchases, the former stockholders and/or key employees have
typically received consideration in the form of cash, subordinated notes and
warrants to purchase UAM common stock, or UAM common stock. The subordinated
notes, most of which may be used to exercise the warrants, generally have
terms of between five and 10 years. The key employees of each Affiliated
Firm also participate directly, through revenue sharing, in revenues of their
firm and meet the firm's expenses from their share of these revenues, as
described more fully under "Revenue Sharing."
UAM has over the past several years identified a substantial number of
institutional investment management firms both domestically and
internationally which it believes may be candidates for future acquisition on
the basis of an evaluation of their personnel, investment approach, client
base, revenues and profitability.
To fund acquisitions, the Company utilizes its existing capital,
together with Operating Cash Flow (net income (loss) plus amortization,
depreciation and the reduction in value of intangible assets, net of taxes)
and borrowings available under its $500,000,000 Reducing Revolving Credit
Agreement (as more fully described in Note 3 to the Consolidated Financial
Statements; also see Items 8 and 14 of this Form 10-K). Such borrowings are
secured by the stock of the Company's subsidiaries.
METHOD OF OPERATION
UAM itself does not manage portfolio investments for clients and does
not provide any investment advisory services to Affiliated Firms and
therefore is not registered as an investment adviser under federal, state or
foreign law. UAM respects the individual character of each Affiliated Firm
and seeks to preserve an environment in which each Firm continues to provide
investment management services which meet the particular needs of the Firm's
clients. UAM provides assistance to the Affiliated Firms in connection with
the preparation of separate company financial statements, tax matters,
insurance and maintenance of a company-wide profit sharing retirement plan.
In addition, UAM has an Operations Group and a Marketing and Service
Strategies Group composed of senior officers of the Company who are
responsible for establishing new marketing and service organizations,
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creating growth incentives and encouraging the undertaking of new projects
and programs by the Affiliated Firms. Upon request, the Operations Group is
also available to assist Affiliated Firms in planning for future growth and
management development, particularly with respect to succession planning.
The Company also sponsors seminars and meetings for executives from each of
the Affiliated Firms and from UAM which serve as forums for sharing business
information.
In recent years, UAM has established a number of organizations that
augment the marketing and client service capabilities of its Affiliated Firms.
UAM Retirement Plan Services, Inc. participates in the growth of the
defined contribution plan sector of the market. This affiliate designs and
markets bundled defined contribution plan services, including investment
management capabilities through UAM Funds portfolios, in addition to offering
employee education, recordkeeping and trustee services to the sponsors of
these plans.
United Asset Management (Japan), Inc. offers the diverse investment
management services of the Affiliated Firms to the Japanese institutional
market. UAM (Japan) has a license that allows them to offer fully
discretionary investment management services to Japanese institutional
investors.
UAM Investment Services, Inc. provides multi-product and global
capabilities to large defined benefit pension plans and other major
institutional investors such as insurance companies, as well as to financial
planners, on behalf of the Affiliated Firms. It provides a single convenient
channel through which clients, both domestically and abroad, can utilize the
many investment management products offered by the Affiliated Firms.
UAM Funds, Inc., a series mutual fund, allows Affiliated Firms to open
portfolios to pool client accounts in an efficient, cost-effective manner and
to provide additional investment styles. As of December 31, 1997, 20 of the
Affiliated Firms managed 43 UAM Funds portfolios, and such portfolios held
assets totaling $3.2 billion.
UAM Fund Services, Inc. oversees service providers used by UAM Funds,
Inc. and, upon request, by separate fund families offered by Affiliated
Firms.
UAM Trust Company assists Affiliated Firms in establishing commingled
investment pools for their clients. Collective group trusts and other
commingled investment vehicles can fit those situations where neither
separately managed accounts nor mutual funds meet clients' needs.
During 1997, UAM Shareholder Service Center, Inc. was established with
the assistance of Pilgrim Baxter & Associates, Ltd. to provide telephone
servicing and transfer agent support to UAM mutual fund groups.
UAM believes that the professional independence of the Affiliated Firms
and the continuing diversification of investment philosophies and approaches
within the Company are necessary ingredients of UAM's success and that of the
Affiliated Firms. Most key employees of each Affiliated Firm at the time of
acquisition by UAM have continued with their Firm in accordance with
employment agreements executed in connection with each acquisition, have
remained on their Firm's Board of Directors, and have continued to serve as
its executive officers. Each Affiliated Firm's directors and officers are
responsible for reviewing their respective Firm's results, plans and budgets.
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UAM intends to continue the method of operation described above as it
acquires or organizes additional firms.
REVENUE SHARING
UAM operates with the Affiliated Firms under revenue sharing plans.
Such plans permit each Firm to retain a specified percentage of its revenues
(typically 50-70%) for use by its principals at their discretion in paying
expenses of operations, including salaries and bonuses. The purposes of the
plans are to provide significant ongoing incentives for the principals of the
Affiliated Firms to continue working as they did prior to the sale of their
firm to UAM, to support their autonomy, and to allow UAM to participate in
the growth of revenues of each Affiliated Firm. The plans are designed to
allow each Firm's principals to participate in that Firm's growth in a
substantial manner and to make operating decisions freely within the limits
of that portion of the Firm's revenues which is retained by the Firm. In
effect, the portion of its revenues retained by each Firm that is not used to
pay salaries and other operating expenses is available for payment to the
principals and other key employees of such Firm in the form of bonuses. The
portion of Affiliated Firm revenues retained by the Firms and used to pay
salaries and bonuses and to fund operating expenses is included in the
Company's Consolidated Statement of Operations.
Under each agreement, when an Affiliated Firm is acquired by UAM, the
base revenues of the Firm are established, and a share of such revenues is
allocated to UAM, with the balance being the acquired Firm's share of
revenues. In addition, agreement is reached on the Firm's and UAM's
respective percentage shares of changes in such Firm's revenues compared to
its base revenues. The Affiliated Firm is required to pay for all of its
business expenses out of its share of revenues. Each year, the amount of the
Affiliated Firm's revenues that is paid to UAM and the amount that is
retained by the Firm are adjusted upwards in the case of growth in such
Firm's revenues over its base, or downwards in the case of decreases in such
Firm's revenues below its base, by applying the agreed-upon percentages to
the total increase or decrease in the Firm's revenues. Under most of the
existing revenue sharing agreements, UAM's share of increases above a Firm's
base revenues is between 30% and 50%, and UAM's share of decreases below a
Firm's base revenues is between 50% and 70%. Thus, in any year in which the
Affiliated Firm's revenues increase over its base revenues, the Firm retains
a portion of such additional amounts to use as its principals may decide.
The balance of the increase in the Affiliated Firm's revenues is paid to UAM,
in addition to UAM's share of such Firm's base revenues. In any year in
which the Affiliated Firm's revenues decrease to a level below its base
revenues, the Firm's share of its base revenues is reduced by the Firm's
portion of the decrease, and therefore, the Firm may need to reduce its
expenses. Similarly, the revenue sharing amount paid to UAM will be reduced
by UAM's share of any decline in the Affiliated Firm's revenues below its
base.
In addition to revenue sharing with its Affiliated Firms, UAM has
designed incentive programs to further reward business growth through
positive net client cash flow. Incentives awarded under these programs are
paid in the combination of cash, stock options and incentive units. The
Company also co-invests with its Firms in marketing, distribution and
new-product development.
AFFILIATED FIRMS
Each Affiliated Firm conducts its own marketing, client relations,
research, portfolio management and administrative functions. Each Firm sets
its own investment advisory fees and manages its business independently on a
day-to-day basis.
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The investment philosophy, style and approach of each Affiliated Firm
are independently determined by it, and these philosophies, styles and
approaches may vary substantially from firm to firm. As a consequence, more
than one Affiliated Firm may be retained by a single client, since many
clients employ multiple investment advisers. The strategies employed and
assets selected by Affiliated Firms are separately chosen by them, with the
result that any one Firm may be bullish on the stock or bond market while
another Firm is bearish. Two of the Affiliated Firms are full-service
institutional real estate investment management firms with $11.1 billion of
assets under management at year end. These Firms invest in real estate
properties in the U.S. and overseas for their U.S. and foreign clients and
provide a broad spectrum of real estate services, including research,
acquisition and disposition, financing, and asset and property management.
In addition, another Affiliated Firm, with $9.0 billion of assets under
management at year end, manages stable value asset portfolios such as
guaranteed investment contracts (GICs) and synthetic GICs.
All of these differences, when combined with the separate names and
identities of the various Affiliated Firms may: (a) tend to insulate UAM from
the various cycles of market performance for specific asset classes and
individual Firms; (b) permit more than one Affiliated Firm to serve any
single client; and (c) mean that some Affiliated Firms may attract
substantial new business while other Firms may grow more slowly or lose
business.
UAM's Firms manage both domestic and international investment portfolios
for corporate benefit plans, mutual funds, government and union benefit
plans, individuals, endowments, and foundations. As of December 31, 1997,
UAM's Firms had approximately $197.5 billion under management with an average
account size of $35.3 million. The 20 largest clients of UAM's affiliates
represented 16% of total revenues and the 100 largest clients represented
28%. Additional information regarding the number of clients and types and
amounts of assets under management is found in the table on page 36 of the
Company's 1997 Annual Report to Shareholders (the Annual Report), which table
is incorporated herein by reference.
The following table summarizes UAM's asset mix:
<TABLE>
<CAPTION>
Assets Under Management at December 31,
1995 1996 1997
(in millions) ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Equities $ 84,465 59% $ 99,814 58% $123,213 63%
U.S. Bonds and Cash 25,130 18 27,266 16 27,164 14
International Securities 10,897 8 21,764 13 27,947 14
Real Estate 14,227 10 13,909 8 10,515 5
Stable Value 7,405 5 8,274 5 8,650 4
-------- --- -------- --- -------- ---
$142,124 100% $171,027 100% $197,489 100%
-------- --- -------- --- -------- ---
-------- --- -------- --- -------- ---
</TABLE>
As previously described, each Affiliated Firm is responsible for
marketing its own investment management services. Typically, one or more of
the employees at each Firm are responsible for making initial contact with
prospective clients. Most Firms have brochures describing the Firm, its
principals and its investment approach. These brochures are mailed to
prospective clients, in addition to soliciting clients by telephone and in
person. Once initial contact is made, face-to-face meetings between the
principals of a Firm and the prospective client take place in order to
discuss investment philosophy, management fees and a variety of other related
matters.
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REGULATION
UAM's domestic investment advisory subsidiaries are registered with and
subject to regulation by the Securities and Exchange Commission (the SEC)
under the Investment Advisers Act of 1940 and, where applicable, under state
advisory laws. The Company's foreign investment advisory affiliates are
members of or subject to certain self-regulatory bodies or other regulatory
agencies. The Company's brokerage subsidiaries are registered as
broker-dealers with the SEC under the Securities Exchange Act of 1934 and,
where applicable, under state securities laws, and are regulated by the SEC,
state securities administrators and the National Association of Securities
Dealers, Inc. Five Affiliated Firms are regulated by the Commodities Futures
Trading Commission, and among the Affiliated Firms are four trust companies
which are subject to regulation by the Office of Comptroller of the Currency
or applicable state law.
UAM's domestic investment advisory subsidiaries are subject to ERISA and
its regulations to the extent they are "fiduciaries" under ERISA with respect
to their clients.
Registrations, reporting, maintenance of books and records and
compliance procedures required by these laws and regulations are maintained
independently by each UAM subsidiary.
The officers, directors and employees of UAM's Affiliated Firms may from
time to time own securities which are also owned by one or more of their
clients. Each such Firm has internal guidelines and codes of ethics with
respect to individual investments, requires reporting of securities
transactions and restricts certain transactions so as to minimize possible
conflicts of interest.
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UAM's Affiliated Firms as of December 31, 1997 are listed below in the order
in which they were acquired or established.
<TABLE>
<CAPTION>
Principal Acquired
Affiliated Firm Location or Organized
- --------------- --------- ------------
<S> <C> <C>
Nelson, Benson & Zellmer, Inc. Denver, CO August 1983
Chicago Asset Management Company Chicago, IL October 1983
Colony Capital Management, Inc.(1) Atlanta, GA February 1984
Hellman, Jordan Management Company, Inc. Boston, MA August 1984
Thompson, Siegel & Walmsley, Inc. Richmond, VA December 1984
Sterling Capital Management Company Charlotte, NC December 1984
Analytic-TSA Global Asset Management, Inc. Los Angeles, CA May 1985
Northern Capital Management, Inc. Madison, WI January 1986
Cooke & Bieler, Inc. Philadelphia, PA February 1986
Fiduciary Management Associates, Inc. Chicago, IL June 1986
Investment Counselors of Maryland, Inc. Baltimore, MD December 1986
HMH Investment Advisors, Inc. (2) Boston, MA December 1986
Rothschild/Pell, Rudman & Co., Inc. Baltimore, MD December 1986
Rice, Hall, James & Associates San Diego, CA May 1987
C.S. McKee & Company, Inc. Pittsburgh, PA August 1987
Hanson Investment Management Company San Rafael, CA August 1987
Barrow, Hanley, Mewhinney & Strauss, Inc. Dallas, TX January 1988
Sirach Capital Management, Inc. Seattle, WA January 1989
Dewey Square Investors Corporation Boston, MA May 1989
The Campbell Group, Inc. Portland, OR May 1989
Cambiar Investors, Inc. Englewood, CO August 1990
First Pacific Advisors, Inc. Los Angeles, CA June 1991
Spectrum Asset Management, Inc. Stamford, CT November 1991
Acadian Asset Management, Inc. Boston, MA February 1992
The L&B Group Dallas, TX June 1992
NWQ Investment Management Company Los Angeles, CA October 1992
Tom Johnson Investment Management, Inc. Oklahoma City, OK December 1992
UAM Retirement Plan Services, Inc. New York, NY February 1993
Pell, Rudman & Co., Inc. Boston, MA March 1993
Heitman Financial Ltd. Chicago, IL August 1993
Murray Johnstone Limited Glasgow, Scotland November 1993
GSB Investment Management, Inc. Fort Worth, TX December 1993
Dwight Asset Management Company Burlington, VT January 1994
Investment Research Company San Diego, CA February 1994
Suffolk Capital Management, Inc. New York, NY July 1994
United Asset Management (Japan), Inc. Tokyo, Japan October 1994
UAM Investment Services, Inc. Boston, MA January 1995
Provident Investment Counsel Pasadena, CA February 1995
Pilgrim Baxter & Associates, Ltd. Wayne, PA April 1995
Jacobs Asset Management Fort Lauderdale, FL July 1995
UAM Fund Services, Inc. Boston, MA October 1995
OSV Partners Greenwich, CT April 1996
Rogge Global Partners Plc London, England August 1996
Clay Finlay Inc. New York, NY August 1996
J.R. Senecal & Associates Investment
Counsel Corp. Richmond Hill, Ontario January 1997
InvestLink Technologies, Inc. New York, NY February 1997
Expertise Asset Management Paris, France May 1997
Pacific Financial Research, Inc. Beverly Hills, CA May 1997
Thomson Horstmann & Bryant, Inc. Saddle Brook, NJ June 1997
Lincluden Management Limited Oakville, Ontario September 1997
Palladyne Asset Management B.V. Amsterdam, The Netherlands December 1997
</TABLE>
(1) During 1997, Hamilton, Allen & Associates, Inc. changed its name to
Colony Capital Management, Inc.
(2) Effective January 1, 1998, Hagler, Mastrovita & Hewitt, Inc. changed its
name to HMH Investment Advisors, Inc.
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EMPLOYEES
The UAM holding company has 72 employees, 12 of whom are executive
officers of UAM (see Item 10, Directors and Executive Officers). Each
Affiliated Firm employs its own investment advisory, marketing and client
service, administrative and operations personnel as needed to provide
advisory services to its clients and to maintain necessary records in
accordance with the rules of various regulatory agencies (see "Affiliated
Firms" and "Regulation" on pages 6 and 8, respectively). At December 31,
1997, the Company, as a whole, employed 2,486 persons. These numbers exclude
1,240 individuals who are employed by the property management subsidiaries of
The L&B Group and Heitman Financial Ltd. and whose total compensation is
billed directly to clients of these affiliates.
ITEM 2. PROPERTIES
UAM's only offices are its executive offices in Boston, Massachusetts,
which occupy approximately 22,000 square feet under a lease which expires in
2002. Affiliated Firms are likewise lessees of their respective offices
under leases which expire at various dates.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of the Company's subsidiaries are subject to
legal proceedings arising in the ordinary course of business. On the basis
of information presently available and advice received from legal counsel, it
is the opinion of management that the disposition or ultimate determination
of such legal proceedings will not have a material adverse effect on the
Company's consolidated financial position, its consolidated results of
operations or its consolidated cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of the security holders of the
Company during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During the fourth quarter of 1997, UAM issued an aggregate of 191,898
shares of common stock, $.01 par value, pursuant to Section 4(2) of the
Securities Act of 1933, as amended, (the Act), to certain executives of its
subsidiaries upon the exercise of warrants originally issued in connection
with the acquisition of such subsidiaries by UAM. The exercise prices of the
warrants ranged from $16.50 to $23.00 per share.
During 1996, UAM issued warrants to the former owners of Pilgrim Baxter
& Associates, Ltd. resulting from a contingent payment earned as specified in
the Acquisition Agreement dated February 3, 1995. Warrants to purchase
62,010 shares of common stock, $.01 par value, of UAM for $23.00 per share,
were issued and may be exercisable in whole or in part prior to the earlier
of (a) February 28, 2003 or (b) if UAM gives notice specified in the Warrant
Agreement, at such time as the closing price of common stock of UAM reaches
specified levels for periods specified in the Warrant Agreement. These
warrants and the shares of common stock issuable upon exercise thereof have
not been registered under the Act in reliance on the exemption for
transactions not involving a public offering contained in Section 4(2) of the
Act. The warrants contain, and the shares issuable upon exercise will contain,
10
<PAGE>
restrictive legends. No commission was paid to any underwriter in connection
with the issuance of the warrants.
Also during 1996, UAM issued an aggregate of 1,481,609 shares of common
stock, $.01 par value, pursuant to Section 4(2) of the Act to certain
executives of its subsidiaries upon the exercise of warrants originally
issued in connection with the acquisition of such subsidiaries by UAM. The
excercise prices of the warrants ranged from $8.11 to $16.50 per share.
As of March 13, 1998, there were 484 stockholders of record. The
balance of the information required by this item is incorporated herein by
reference to the "Common Stock Information" on page 60 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the "Eleven-Year Review" on pages 42 and 43 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to the "Management's Discussion and Analysis" on pages 37 through
41 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the "Selected Quarterly Financial Data" on page 60 of the Annual
Report, "Consolidated Financial Statements" and "Notes to the Consolidated
Financial Statements" on pages 44 through 58 of the Annual Report, and the
"Report of Independent Accountants" on page 59 of the Annual Report. (See
also the "Financial Statement Schedule" filed under Item 14 of this Form
10-K.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by
reference to the sections entitled "Election of Directors - Nominees for
Election as Directors," "Executive Compensation - Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" included in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 21, 1998 (the "Proxy Statement").
11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the sections entitled "Executive Compensation - Summary
Compensation Table," "Executive Compensation - Stock Options," "Executive
Compensation - Compensation Committee Report," "Company Stock Performance,"
"Compensation Committee Interlocks and Insider Participation" and "Election
of Directors - Directors' Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the section entitled "Security Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section entitled "Election of Directors - Certain
Transactions with Management and Others" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of United Asset
Management Corporation and report of independent accountants, included on
pages 44 through 59 of the Annual Report, are incorporated herein by
reference as a part of this Form 10-K:
<TABLE>
<CAPTION>
Page(s) in the
Title Annual Report
----- --------------
<S> <C>
Report of Independent Accountants 59
Consolidated Balance Sheet as of December 31, 1997
and 1996 44
Consolidated Statement of Operations for each of the
three years in the period ended December 31, 1997 45
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1997 46
Consolidated Statement of Changes in Stockholders'
Equity for each of the three years in the period ended
December 31, 1997 47
Notes to Consolidated Financial Statements 48-58
</TABLE>
12
<PAGE>
2. Financial Statement Schedule
The following consolidated financial statement schedule and report of
independent accountants are filed as a part of this Form 10-K and are on
the following pages:
Page
----
Report of Independent Accountants on Financial
Statement Schedule F-1
Schedule VIII Valuation and Qualifying Accounts for
each of the three years in the period
ended December 31, 1997 F-3
All other schedules have been omitted since they are not required, not
applicable or the information is in the Financial Statements or Notes
thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Title
------- -----
<S> <C>
(1) 3.1 Restated Certificate of Incorporation of the Registrant.
(2) 3.2 Amended and Restated By-Laws of the Registrant.
(3) 4.1 Specimen Certificate of Common Stock, $.01 par value, of
the Registrant.
(4) 4.2 Agreement to furnish copies of subordinated debt instruments
to the Commission.
9.0 Not Applicable.
(1) 10.1 Second Amended and Restated Reducing Credit Agreement dated as
of November 18, 1994, among United Asset Management Corporation,
the banks parties thereto, Morgan Guaranty Trust Company of New York,
as Agent, and The First National Bank of Boston, as Collateral Agent.
(5) 10.2 Note Purchase Agreement dated as of August 1, 1995.
(5) 10.3 First Amendment and consent dated as of August 1, 1995 to the Second
Amended and Restated Credit Agreement dated as of November 18, 1994.
(6) 10.4 Amended and Restated Credit Agreement dated as of April 19, 1996.
10.5 Amendment Number 2 to Credit Agreement dated as of
November 14, 1997.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
(7) 10.6 United Asset Management Corporation Profit Sharing and 401(k) Plan dated
as of May 11, 1989 and amended and restated as of November 26, 1990.
(8) 10.7 Revised First Amendment to United Asset Management Corporation Profit
Sharing and 401(k) Plan effective as of January 1, 1992.
(8) 10.8 Second Amendment to United Asset Management Corporation Profit Sharing
and 401(k) Plan effective as of January 1, 1993.
(1) 10.9 Third Amendment to United Asset Management Corporation Profit Sharing
and 401(k) Plan effective as of January 1, 1994.
(9) 10.10 Fourth Amendment to United Asset Management Corporation Profit Sharing
and 401(k) Plan effective as of January 1, 1995.
(10) 10.11 Amended and Restated 1994 Stock Option Plan effective as of May 15, 1997.
(9) 10.12 United Asset Management Corporation Deferred Compensation Plan effective
January 1, 1994.
(11) 10.13 First Amendment to United Asset Management Corporation Deferred Compensation
Plan effective July 1, 1997.
(12) 10.14 Consulting Agreement between United Asset Management Corporation and David I.
Russell dated as of January 1, 1993.
(13) 10.15 First Amendment to Consulting Agreement between United Asset Management
Corporation and David I. Russell dated as of June 17, 1996.
11.1 Calculation of Earnings (Loss) Per Share.
12.0 Not Applicable.
13.1 Annual Report to Stockholders for the Year Ended December 31, 1997.
16.0 Not Applicable.
18.0 Not Applicable.
21.1 Subsidiaries of the Registrant.
22.0 Not Applicable.
23.1 Consent of Independent Accountants.
24.0 Not Applicable.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
27.1 Financial Data Schedules.
99.1 Cautionary Language Regarding Forward-looking Statements.
</TABLE>
<TABLE>
<CAPTION>
Notes to Exhibit Listing
------------------------
<S> <C>
(1) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Report on Form 8-K on February 2,
1998, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Form S-1 as filed with the Commission
and which became effective on August 22, 1986, and incorporated herein by
reference (Registration No. 33-6874).
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1995, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1996, and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990, and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, and incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and incorporated herein by reference.
(13) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996, and incorporated herein by reference.
</TABLE>
Location of Documents Pertaining to Executive Compensation Plans and
Arrangements:
<TABLE>
<S> <C>
(1) Amended and Restated 1994 Stock Option Plan effective as of May 15, 1997,
Exhibit 10.11 to this Form 10-K.
(2) United Asset Management Corporation Deferred Compensation Plan effective
January 1, 1994, Exhibit 10.12 to this Form 10-K.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
(3) First Amendment to United Asset Management Corporation Deferred Compensation Plan
effective July 1, 1997, Exhibit 10.13 to this Form 10-K.
(4) Consulting Agreement between United Asset Management Corporation and David I. Russell
dated as of January 1, 1993 - Form 10-K for fiscal year ended December 31, 1992, Exhibit
10.14 to this Form 10-K.
(5) First Amendment to Consulting Agreement between United Asset Management Corporation
and David I. Russell dated as of June 17, 1996, Exhibit 10.15 to this Form 10-K.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year covered by this report.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 17, 1998 UNITED ASSET MANAGEMENT CORPORATION
-----------------------------------
(Registrant)
By /s/ Norton H. Reamer By /s/ William H. Park
-------------------------- ----------------------------------
Norton H. Reamer William H. Park
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
/s/ Norton H. Reamer
- ------------------------------- Director March 17, 1998
(Norton H. Reamer)
/s/ Harold J. Baxter
- ------------------------------- Director March 17, 1998
(Harold J. Baxter)
/s/ J. Duncan Campbell, Jr.
- ------------------------------- Director March 17, 1998
(J. Duncan Campbell, Jr.)
/s/ John P. Clay
- ------------------------------- Director March 17, 1998
(John P. Clay)
/s/ Robert J. Greenebaum
- ------------------------------- Director March 17, 1998
(Robert J. Greenebaum)
/s/ Charles E. Haldeman, Jr.
- ------------------------------- Director March 17, 1998
(Charles E. Haldeman, Jr.)
/s/ Beverly L. Hamilton
- ------------------------------- Director March 17, 1998
(Beverly L. Hamilton)
/s/ Bryant M. Hanley, Jr.
- ------------------------------- Director March 17, 1998
(Bryant M. Hanley, Jr.)
/s/ Jay O. Light
- ------------------------------- Director March 17, 1998
(Jay O. Light)
/s/ John F. McNamara
- ------------------------------- Director March 17, 1998
(John F. McNamara)
/s/ David I. Russell
- ------------------------------- Director March 17, 1998
(David I. Russell)
/s/ Philip Scaturro
- ------------------------------- Director March 17, 1998
(Philip Scaturro)
/s/ John A. Shane
- ------------------------------- Director March 17, 1998
(John A. Shane)
/s/ Larry D. Tashjian
- ------------------------------- Director March 17, 1998
(Larry D. Tashjian)
/s/ Barbara S. Thomas
- ------------------------------- Director March 17, 1998
(Barbara S. Thomas)
17
<PAGE>
UNITED ASSET MANAGEMENT CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE (1)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31, 1997
BASIC LOSS PER SHARE
Loss available to common
shareholders $(4,133,000) 69,611,000 $(.06)
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - -
Options - -
------------ ------------
DILUTED LOSS PER SHARE
Loss available to common
shareholders + assumed conversions $(4,133,000) 69,611,000 $(.06)
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
For the Year Ended December 31, 1996
BASIC EARNINGS PER SHARE
Income available to common
shareholders $97,822,000 68,515,000 $1.43
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - 1,556,000
Options - 1,980,000
------------ ------------
DILUTED EARNINGS PER SHARE
Income available to common
shareholders + assumed conversions $97,822,000 72,051,000 $1.36
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
For the Year Ended December 31, 1995
BASIC EARNINGS PER SHARE
Income available to common
shareholders $67,256,000 67,985,000 $ .99
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - 1,288,000
Options - 1,614,000
------------ ------------
DILUTED EARNINGS PER SHARE
Income available to common
shareholders + assumed conversions $67,256,000 70,887,000 $ .95
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Statement of Financial Accounting Standards
No. 128, Earnings per Share, which became effective for financial
statements issued for annual periods ending after December 15, 1997, with
prior periods restated.
(2) Options on 7,013,000, 96,000 and 1,414,000 shares of common stock and
warrants on 9,350,000, 708,000 and 5,932,000 shares of common stock were
outstanding during 1997, 1996 and 1995, respectively, but were not included
in computing diluted earnings (loss) per share in each of these years
because their effects were antidilutive.
18
<PAGE>
UNITED ASSET MANAGEMENT CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of Financial
Affiliated Firm Organization Statements
- --------------- ------------ ----------
<S> <C> <C>
Acadian Asset Management, Inc. Massachusetts Consolidated
Analytic-TSA Global Asset Management, Inc. California Consolidated
Barrow, Hanley, Mewhinney & Strauss, Inc. Nevada Consolidated
Cambiar Investors, Inc. Colorado Consolidated
The Campbell Group, Inc. Delaware Consolidated
Chicago Asset Management Company Delaware Consolidated
Clay Finlay Inc. New York Consolidated
Colony Capital Management, Inc. Delaware Consolidated
Cooke & Bieler, Inc. Pennsylvania Consolidated
Dewey Square Investors Corporation Delaware Consolidated
Dwight Asset Management Company Delaware Consolidated
Expertise Asset Management France Consolidated
Fiduciary Management Associates, Inc. Delaware Consolidated
First Pacific Advisors, Inc. Massachusetts Consolidated
GSB Investment Management, Inc. Delaware Consolidated
Hanson Investment Management Company California Consolidated
Heitman Financial Ltd. Delaware Consolidated
Heitman Properties Ltd.(1) Illinois Consolidated
Heitman Capital Management Corporation Illinois Consolidated
Hellman, Jordan Management Company, Inc. Delaware Consolidated
HMH Investment Advisors, Inc. Delaware Consolidated
Investment Counselors of Maryland, Inc. Maryland Consolidated
Investment Research Company Illinois Consolidated
InvestLink Technologies, Inc. New Jersey Consolidated
Jacobs Asset Management Delaware Consolidated
Tom Johnson Investment Management, Inc. Massachusetts Consolidated
L&B Realty Advisors, Inc. (The L&B Group) Delaware Consolidated
L&B Institutional Property Managers, Inc.(2) Delaware Consolidated
L&B Real Estate Counsel Texas Consolidated
Lincluden Management Limited Ontario Consolidated
C.S. McKee & Company, Inc. Pennsylvania Consolidated
Murray Johnstone Limited Scotland Consolidated
Nelson, Benson & Zellmer, Inc. Colorado Consolidated
Northern Capital Management, Inc. Wisconsin Consolidated
NWQ Investment Management Company Massachusetts Consolidated
OSV Partners Delaware Consolidated
Pacific Financial Research, Inc. Massachusetts Consolidated
Palladyne Asset Management B.V. The Netherlands Consolidated
Pell, Rudman & Co., Inc. Delaware Consolidated
Pilgrim Baxter & Associates, Ltd. Delaware Consolidated
Provident Investment Counsel Massachusetts Consolidated
Rice, Hall, James & Associates California Consolidated
Rogge Global Partners Plc United Kingdom Consolidated
Rothschild/Pell, Rudman & Co., Inc. Maryland Consolidated
J. R. Senecal & Associates Investment Counsel Corp. Ontario Consolidated
Sirach Capital Management, Inc. Washington Consolidated
Spectrum Asset Management, Inc. Connecticut Consolidated
Sterling Capital Management Company North Carolina Consolidated
Suffolk Capital Management, Inc. Delaware Consolidated
Thompson, Siegel & Walmsley, Inc. Virginia Consolidated
Thomson Horstmann & Bryant, Inc. Delaware Consolidated
UAM Fund Distributors, Inc. Massachusetts Consolidated
UAM Fund Services, Inc. Delaware Consolidated
UAM Investment Services, Inc. Delaware Consolidated
UAM Retirement Plan Services, Inc. Delaware Consolidated
UAM Shareholder Service Center, Inc. Delaware Consolidated
UAM Trust Company Maryland Consolidated
United Asset Management (Japan), Inc. Delaware Consolidated
</TABLE>
All of the Registrant's subsidiaries do business under the respective names
indicated above and are wholly owned except for Lincluden Management Limited in
which UAM owns a 49% interest.
(1) Heitman Properties Ltd. has 41 property management subsidiaries operating
in the U.S.
(2) L&B Institutional Property Managers, Inc. has seven property management
subsidiaries operating in the U.S.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of United Asset Management Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 3, 1998 appearing on page 59 of the 1997 Annual Report to
Stockholders of United Asset Management Corporation (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/Price Waterhouse LLP
- -----------------------
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
F-1
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-63350,
33-52517, 33-57049, 33-64449, 333-11395 and 333-11397) and in the
Registration Statements on Form S-8 (Nos. 33-10621, 33-21756, 33-34288,
33-48858, 33-54233 and 33-28981) of United Asset Management Corporation of
our report dated February 3, 1998 appearing on page 59 of the Annual Report
to Stockholders which is incorporated in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page F-1 of this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
March 25, 1998
F-2
<PAGE>
UNITED ASSET MANAGEMENT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Cost Assigned
to Contracts Acquired Accumulated Amortization
--------------------------------------- ---------------------------------------------------
Weighted
Range of Average Ending
Estimated Estimated Tax
Remaining Remaining Charged to Balance
Lives Lives Beginning Additions Ending Beginning Operations Ending In Excess
Firm (in years) (in years) Balance and Other Balance Balance and Other Balance of Book
- ------ ---------- ---------- ---------- --------- ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
----
HFL 3-21 14 $ 212,668 $ 7,748 $ 220,416 $ 1,142 $ 14,678 $ 15,820 $ -
NWQ 1-10 9 96,076 - 96,076 17,752 8,077 25,829 21,620
PBA 5-17 15 - 104,605 104,605 - 4,293 4,293 789
PIC 3-23 18 - 347,307 347,307 - 16,309 16,309 5,344
All Others 1-19 7 638,226 14,682 652,908 253,550 49,835 303,385 76,095
---------- -------- ---------- -------- -------- -------- --------
$ 946,970 $474,342 $1,421,312 $272,444 $ 93,192 $365,636 $103,848
---------- -------- ---------- -------- -------- -------- --------
---------- -------- ---------- -------- -------- -------- --------
1996
----
HFL 2-20 13 $ 220,416 $ - $ 220,416 $ 15,820 $ 14,712 $ 30,532 $ 2,621
PBA 4-16 14 104,605 12,528 117,133 4,293 6,601 10,894 1,129
PIC 2-22 16 347,307 (167) 347,140 16,309 19,591 35,900 9,102
All Others 1-18 5 748,984 (6,216) 742,768 329,214 61,031 390,245 91,650
---------- -------- ---------- -------- -------- -------- --------
$1,421,312 $ 6,145 $1,427,457 $365,636 $101,935 $467,571 $104,502
---------- -------- ---------- -------- -------- -------- --------
---------- -------- ---------- -------- -------- -------- --------
1997
----
PBA 3-15 13 $ 117,133 $ - $ 117,133 $ 10,894 $ 7,375 $ 18,269 $ 510
PFR 15 15 - 128,391 128,391 - 4,725 4,725 979
PIC 1-21 15 347,140 69,021 416,161 35,900 19,596 55,496 12,885
All Others 1-17 6 963,184 137,098 1,100,282 420,777 244,528(1) 665,305 (53,137)
---------- -------- ---------- -------- -------- -------- --------
$1,427,457 $334,510 $1,761,967 $467,571 $276,224 $743,795 $(38,763)
---------- -------- ---------- -------- -------- -------- --------
---------- -------- ---------- -------- -------- -------- --------
</TABLE>
(1) Includes the 1997 noncash reduction in value of intangible assets recorded
to reflect an impairment of the cost assigned to contracts acquired due to
a projected decline in revenues at two affiliates.
F-3
<PAGE>
CONFORMED COPY
AMENDMENT NUMBER 2 TO CREDIT AGREEMENT
AMENDMENT NUMBER 2 dated as of November 14, 1997 with respect to the
Amended and Restated Credit Agreement dated as of April 19, 1996 among United
Asset Management Corporation, a Delaware corporation (the "Borrower"), the banks
listed on the signature pages thereof, Morgan Guaranty Trust Company of New
York, as Administrative Agent (the "Administrative Agent") and BankBoston, as
Collateral Agent (as amended by Amendment Number 1 dated as of November 20,
1996, the "Credit Agreement").
WHEREAS, the Borrower, the Banks, the Collateral Agent and the
Administrative Agent have entered into the Credit Agreement referenced above;
and
WHEREAS, the parties hereto desire to amend Section 5.15 of the Credit
Agreement under the terms and conditions set forth below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise specifically defined herein,
each term used herein which is defined in the Credit Agreement shall have the
meaning assigned to such term in the Credit Agreement.
SECTION 2. AMENDMENT TO CREDIT AGREEMENT. Section 5.15 of the Credit
Agreement is amended in its entirety to read as follows:
Section 5.15. RESTRICTED PAYMENTS. The aggregate amount of
Restricted Payments made by the Borrower and its Subsidiaries will be less
than:
(i) for the period from April 1, 1997 to November 14, 1997, the
sum of $25,000,000 PLUS 31.25% of Consolidated Operating Cash Flow for
the period from December 1, 1996 to November 30, 1997,
(ii) for the period from November 15, 1998 to March 31, 1999,
18.75% of Consolidated Operating Cash Flow for the period from April
1, 1998 to March 31, 1999 and
(iii) for each succeeding twelve-month period thereafter, the sum
of 50% of Consolidated Operating Cash Flow for such twelve-
<PAGE>
month period PLUS an amount (the "Carryover Amount"), not to exceed
$25,000,000, equal to the difference between the amount of Restricted
Payments permitted to be made under this Section in the previous
twelve-month period and the amount actually made; PROVIDED that for
purposes of calculating the Carryover Amount for the twelve-month
period beginning April 1, 1999, the amount of Restricted Payments
permitted to be made in the previous twelve-month period shall be
deemed to be 50% of Consolidated Operating Cash Flow for such previous
twelve-month period.
The amount of Restricted Payments made in each period shall be determined
by the Borrower and furnished to the Administrative Agent within 90 days
after the end of each such period.
SECTION 3. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
one or more counterparts, each of which, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same Amendment with the same force and effect as if
the signatures of all of the parties were on a single counterpart, and it shall
not be necessary in making proof of this Amendment to produce more than one such
counterpart. This Amendment shall become effective as of the date hereof upon
receipt by the Administrative Agent of duly executed counterparts hereof signed
by the Borrower and the Required Banks (or, in the case of any party as to which
an executed counterpart shall not have been received, the Administrative Agent
shall have received telegraphic, telex, facsimile or other written confirmation
from such party of execution of a counterpart hereof by such party).
SECTION 4. GOVERNING LAW. This Amendment shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of New
York (without reference to conflict of laws principles).
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered as
of the date first above written.
UNITED ASSET MANAGEMENT CORPORATION
By /s/ Juliana M. Coyle
-------------------------------------------
Title: Treasurer and Vice President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank
and Administrative Agent
By /s/ Seija K. Hurskainen
-------------------------------------------
Title: Vice President
BANKBOSTON, as Bank and Collateral Agent
By /s/ Stewart P. Neff
-------------------------------------------
Title: Managing Director
ABN AMRO BANK, N.V.
By /s/ E. VanderMeulen
-------------------------------------------
Title: Vice President
By /S/ JOHN KIRK
-------------------------------------------
Title: Senior Vice President
<PAGE>
[per pro] BROWN BROTHERS HARRIMAN & CO.
By /s/ Louise A. Coughlan
-------------------------------------------
Title: Manager
THE CHASE MANHATTAN BANK
By /s/ David J. Cintron
-------------------------------------------
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By
-------------------------------------------
Title:
DEUTSCHE BANK AG, NEW YORK BRANCH and/or CAYMAN
ISLANDS BRANCH
By /s/ Aaron H. Dorr
-------------------------------------------
Title: Assistant Vice President
By /s/ Indra Kish
-------------------------------------------
Title: Assistant Vice President
FLEET NATIONAL BANK
<PAGE>
By /s/ Brenda H. Senak
-------------------------------------------
Title: Vice President
ING CAPITAL
By /s/ Kunduck Moon
-------------------------------------------
Title: Managing Director
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By
-------------------------------------------
Title:
MELLON BANK, N.A.
By /s/ Joanna Patterson
-------------------------------------------
Title: Officer
NATIONSBANK, N.A.
By
-------------------------------------------
Title:
<PAGE>
ROYAL BANK OF SCOTLAND, PLC
By /s/ David Dougan
-------------------------------------------
Title: Vice President
SOCIETE GENERALE
By
-------------------------------------------
Title:
STATE STREET BANK AND TRUST COMPANY
By /s/ Edward A. Siegel
-------------------------------------------
Title: Assistant Vice President
THE SUMITOMO BANK, LIMITED
By /s/ Daniel G. Eastman
-------------------------------------------
Title: Vice President & Manager
<PAGE>
By /s/ Alfred Degemmis
-------------------------------------------
Title: Vice President
WACHOVIA BANK, N.A.
By /s/ John P. Rafferty
-------------------------------------------
Title: Vice President
<PAGE>
UNITED ASSET MANAGEMENT CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE (1)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31, 1997
BASIC LOSS PER SHARE
Loss available to common
shareholders $(4,133,000) 69,611,000 $(.06)
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - -
Options - -
------------ ------------
DILUTED LOSS PER SHARE
Loss available to common
shareholders + assumed conversions $(4,133,000) 69,611,000 $(.06)
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
For the Year Ended December 31, 1996
BASIC EARNINGS PER SHARE
Income available to common
shareholders $97,822,000 68,515,000 $1.43
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - 1,556,000
Options - 1,980,000
------------ ------------
DILUTED EARNINGS PER SHARE
Income available to common
shareholders + assumed conversions $97,822,000 72,051,000 $1.36
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
For the Year Ended December 31, 1995
BASIC EARNINGS PER SHARE
Income available to common
shareholders $67,256,000 67,985,000 $ .99
---------
---------
EFFECT OF DILUTIVE SECURITIES (2)
Warrants - 1,288,000
Options - 1,614,000
------------ ------------
DILUTED EARNINGS PER SHARE
Income available to common
shareholders + assumed conversions $67,256,000 70,887,000 $ .95
------------ ------------ ---------
------------ ------------ ---------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Statement of Financial Accounting Standards
No. 128, Earnings per Share, which became effective for financial
statements issued for annual periods ending after December 15, 1997, with
prior periods restated.
(2) Options on 7,013,000 , 96,000 and 1,414,000 shares of common stock and
warrants on 9,350,000, 708,000 and 5,932,000 shares of common stock were
outstanding during 1997, 1996 and 1995, respectively, but were not included
in computing diluted earnings (loss) per share in each of these years
because their effects were antidilutive.
18
<PAGE>
UNITED ASSET MANAGEMENT'S CLIENTS
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
United Asset Management is a leading firm in the global management of assets. By
funding growth, rewarding outstanding investment performance and ensuring
business stability, while maintaining the autonomy of its firms, UAM has
assembled an outstanding group of independent investment management affiliates
which employ a variety of investment styles to manage a broad mix of asset
classes around the world.
UAM's firms manage both domestic and international investment portfolios for
corporate benefit plans, mutual funds, government and union benefit plans,
individuals, endowments, and foundations. As of December 31, 1997, UAM's firms
had approximately $197.5 billion under management with an average account size
of $35.3 million. The mix of assets under management for clients of UAM's firms
was 63% U.S. equities, 14% U.S. bonds and cash, 14% international securities, 5%
real estate and 4% stable value assets. The 20 largest clients of UAM's
affiliates represented 16% of total revenues and the 100 largest clients
represented 28%.
The goal of each of UAM's firms is to provide superior, focused and individual
service to its clients. A sound and consistent investment philosophy, regular
communications and a keen awareness of individual client needs are all critical
elements in providing this high-quality client service. Because each affiliate
retains its own identity, together with its investment and operating
independence, UAM's structure allows each operating firm to meet or exceed
client expectations, and thereby to retain existing clients and attract new
prospects.
<TABLE>
<CAPTION>
ASSETS UNDER AVERAGE
MANAGEMENT NUMBER ACCOUNT SIZE
AS OF DECEMBER 31, 1997 (IN MILLIONS) PERCENT OF CLIENTS (IN MILLIONS)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Employee Benefit Plans $ 69,333 35.1% 1,537 $ 45.1
Mutual Funds 45,012 22.8 175 257.2
Government Employee Benefit Plans 34,406 17.4 346 99.4
Individuals 18,345 9.3 2,266(1) 8.1
Endowments and Foundations 14,491 7.3 762 19.0
Union Member Benefit Plans 13,205 6.7 285 46.3
Professional Groups 1,607 0.8 202 8.0
Corporate Cash Reserves 1,090 0.6 24 45.4
- --------------------------------------------------------------------------------------------------
$197,489 100.0% 5,597 $ 35.3
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) These clients include 87 wrap-fee relationships with brokerage firms which
represent approximately 27,000 individual accounts with $8.3 billion under
management.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
The revenues of UAM's affiliated firms are derived primarily from fees for
investment advisory services provided to institutional and other clients.
Investment advisory fees are generally a function of the overall fee rate
charged to each account and the level of assets under management by the
affiliated firms. A minor portion of revenues is generated when firms consummate
transactions for client portfolios. Assets under management can be affected by
the addition of new client accounts or client contributions to existing
accounts, withdrawals of assets from or terminations of client accounts and
investment performance, which may depend on general market conditions.
AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED AND OPERATING CASH FLOW (NET
INCOME (LOSS) PLUS AMORTIZATION, DEPRECIATION AND THE REDUCTION IN VALUE OF
INTANGIBLE ASSETS, NET OF TAXES)
Cost assigned to contracts acquired, net of accumulated amortization,
represented approximately 67% of the Company's total assets as of December 31,
1997. Amortization of cost assigned to contracts acquired, which is a noncash
charge, represented 12% of the Company's operating expenses. Recording the cost
assigned to contracts acquired as an asset, with the resulting amortization as
an operating expense, reflects the application of generally accepted accounting
principles to acquisitions by UAM of investment management firms in transactions
accounted for as purchases. The principal assets acquired are the investment
advisory contracts which evidence the firms' ongoing relationships with their
clients.
Although the contracts acquired are typically terminable on 30-days notice,
analyses conducted by independent consultants retained by UAM and the experience
of UAM's firms to date have indicated that: (1) contracts are usually relatively
long-lived; (2) the duration of contracts can be reasonably estimated; and (3)
the value of the cost assigned to contracts acquired can be estimated based on
the present value of its projected income stream.
The cost assigned to contracts acquired is amortized on a straight-line basis
over the estimated weighted average useful life of the contracts of individual
firms acquired. These lives are estimated through statistical analysis of
historical patterns of terminations and the size and age of the contracts
acquired as of the acquisition date.
When actual terminations differ from the statistical patterns developed, or upon
the occurrence of certain other events, the Company updates the lifing analyses
discussed above. If the update indicates that any of the estimates should be
shortened, the remaining cost assigned to contracts acquired will be amortized
over the shorter life commencing in the year in which the new estimate is
determined. The Company regularly performs reviews for potential impairment of
the value of contracts. If the review indicates that the carrying value of the
contracts is impaired, the asset is adjusted to its estimated fair value.
Cost assigned to contracts acquired is amortized as an operating expense. It
does not, however, require the use of cash and therefore, management believes
that it is important to distinguish this expense from other operating expenses
in order to evaluate the performance of the Company. Amortization of cost
assigned to contracts acquired per share referred to below has been calculated
by dividing total amortization by the same number of shares used in the diluted
earnings-per-share calculation.
For purposes of this discussion, Operating Cash Flow is defined as net income
(loss) plus amortization, depreciation and the reduction in value of intangible
assets, net of taxes, as reflected in the Company's Consolidated Statement of
Cash Flows. Management uses Operating Cash Flow not to the exclusion of net
income (loss), but rather as an additional important measure of the Company's
performance.
<PAGE>
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
All per-share information has been restated to reflect Statement of Financial
Accounting Standards No. 128, Earnings per Share, which became effective for
financial statements issued for annual periods ending after December 15, 1997.
1997 COMPARED TO 1996
Revenues increased 7% to $941,621,000 in 1997 from $883,267,000 in 1996. This
increase is the result of positive portfolio performance achieved by UAM's
affiliated firms, as well as purchase business combinations during both 1997 and
1996, partially offset by the effect of net client cash outflows. The revenues
of OSV Partners, J.R. Senecal & Associates Investment Counsel Corp., Pacific
Financial Research, Inc., Thomson Horstmann & Bryant, Inc. and Lincluden
Management Limited, acquired April 22, 1996, January 7, 1997, May 29, 1997, June
6, 1997 and September 4, 1997, respectively, have been included since their
acquisition dates. In 1996, nonrecurring revenues included approximately
$12,000,000 primarily related to the redemption of the Company's minority
interest in Aldrich Eastman Waltch.
During 1997, UAM experienced a net increase in assets under management of $26.5
billion to a total of $197.5 billion at December 31, 1997. Investment
performance of $27.1 billion and acquisitions totaling $15.4 billion were
partially offset by negative net client cash flow of $16.0 billion. The Company
experienced increased negative net client cash flow during 1997. UAM is
undertaking a variety of initiatives focused on improving net client cash flow
in 1998 and beyond.
Compensation and related expenses increased 9% to $470,372,000 from $431,877,000
due to higher compensation earned by employees of existing and newly acquired
affiliated firms in accordance with revenue sharing plans. Amortization of cost
assigned to contracts acquired rose 3% to $105,242,000 from $101,935,000
primarily due to the acquisitions described above. Other operating expenses
increased 18% to $163,927,000 from $138,450,000, reflecting the acquisitions and
higher costs of marketing, client service and product development. The Company
expects to continue the co-investments it makes with affiliates in marketing,
distribution and new-product development. Furthermore, the Company plans to
continue supporting firms at various stages of development.
During the fourth quarter of 1997, the Company recorded a noncash charge
reducing the recorded value of intangible assets to reflect an impairment of the
cost assigned to contracts acquired of $170,982,000 due to a projected decline
in revenues at two affiliates. The assets were reduced to their estimated fair
value.
Interest expense was $43,156,000 in 1997 and $43,289,000 in 1996. The increase
in the Company's average debt levels in 1997 was offset by a decrease in the
average interest rates charged on borrowings.
The loss before income taxes was $7,223,000 in 1997 compared to income before
income taxes of $171,248,000 in 1996. The decrease in income before income taxes
reflects the net result of the events described above. Net loss for 1997 was
$4,133,000 compared to net income of $97,822,000 in 1996. Diluted loss per share
for 1997 was $.06 compared to diluted earnings per share of $1.36 in 1996.
<PAGE>
- --------------------------------------------------------------------------------
Amortization of cost assigned to contracts acquired per share increased to $1.44
in 1997 from $1.41 in 1996 and Operating Cash Flow increased to $213,652,000 in
1997 from $211,371,000 in 1996 primarily as a result of the circumstances
discussed above.
Excluding the effects of both the 1997 reduction in value of intangible assets
of $170,982,000 and the 1996 redemption of the minority interest in Aldrich
Eastman Waltch, net income increased 5% to $95,214,000 in 1997 from $90,719,000
in 1996. Diluted earnings per share increased 4% to $1.31 in 1997 from $1.26 in
1996. Operating Cash Flow increased 5% to $213,652,000 in 1997 from $204,268,000
in 1996.
1996 COMPARED TO 1995
Revenues increased 20% to $883,267,000 in 1996 from $734,353,000 in 1995. This
increase is the result of purchase business combinations during both 1996 and
1995, as well as positive portfolio performance achieved by UAM's affiliated
firms. The revenues of Provident Investment Counsel, Pilgrim Baxter &
Associates, Ltd. and OSV Partners, acquired February 15, 1995, April 28, 1995,
and April 22, 1996, respectively, have been included since their acquisition
dates. In addition, the fourth quarter of 1996 included nonrecurring revenues
approximating $12,000,000 which primarily related to the redemption of the
Company's minority interest in Aldrich Eastman Waltch.
UAM's assets under management reached $171.0 billion at December 31, 1996, a net
increase of $28.9 billion compared to $142.1 billion as originally reported at
December 31, 1995. Acquisitions of assets under management totaling $11.8
billion and investment performance of $20.4 billion during the year were
partially offset by negative net client cash flow of $3.3 billion. This net
client cash flow had a positive effect on revenues due to the replacement of
lower-fee business with higher-fee business.
Compensation and related expenses increased 19% to $431,877,000 from
$362,516,000, and other operating expenses increased 20% to $138,450,000 from
$115,454,000, reflecting the acquisitions described above and higher operating
expenses and compensation earned by employees of existing affiliated firms in
accordance with revenue sharing plans. Amortization of cost assigned to
contracts acquired rose 9% to $101,935,000 from $93,192,000 primarily due to a
full year of contract amortization for Provident Investment Counsel and Pilgrim
Baxter & Associates.
Interest expense decreased to $43,289,000 from $45,880,000 in 1995 due to the
decrease in the Company's average debt levels.
Income before income tax expense increased 44% to $171,248,000 from
$119,010,000, reflecting the net result of the events discussed above. Net
income for 1996 increased 45% to $97,822,000 from $67,256,000 in 1995.
Diluted earnings per share for 1996 increased 43% to $1.36 compared to diluted
earnings per share of $.95 in 1995. This increase reflects the higher net income
and the effect of the Company's common stock repurchased, partially offset by
the impact of the issuance of shares of common stock, the Company's higher
common stock price, and the hypothetical exercise of warrants and stock options
on the calculation of earnings per share under the treasury stock method.
Amortization of cost assigned to contracts acquired per share increased to $1.41
in 1996 from $1.31 in 1995 primarily as a result of the acquisitions described
above.
<PAGE>
- --------------------------------------------------------------------------------
Operating Cash Flow increased 25% to $211,371,000 from $169,008,000 in 1995 as a
result of the circumstances discussed above.
FINANCIAL CONDITION AND LIQUIDITY
The Company generated $213,652,000 of Operating Cash Flow in 1997. This
Operating Cash Flow and additional borrowings under the Company's line of credit
were primarily used to finance the $468,617,000 cash portion of acquisition
activity, to repurchase shares of the Company's common stock for $76,411,000,
and to pay dividends to shareholders totaling $51,543,000. As of December 31,
1997, the Company had working capital of $104,403,000 and had $197,000,000
available under its line of credit (see Note 3 to the Consolidated Financial
Statements included in this Annual Report).
Management believes that the Company's existing capital, together with Operating
Cash Flow and borrowings available under its revolving line of credit, will
provide the Company with sufficient resources to meet its present and reasonably
foreseeable future cash needs. Management expects that the principal uses of
financial resources will be to acquire additional investment management firms,
to fund commitments due or potentially due to former owners of affiliated firms,
to repurchase shares of the Company's common stock and to pay shareholder
dividends. In January 1998, the Company received authorization from its Board of
Directors to expand its stock repurchase program by 8,000,000 shares. In
addition, the Company obtained an amendment of its credit agreement with its
banks which allows it to spend a greater percentage of Operating Cash Flow on
stock repurchases and dividends for one year. The Company does not plan to raise
its dividend in early 1998, when an increase would ordinarily be considered, in
order to increase the amount of cash available for the above-mentioned
investments.
Increases or decreases in interest rates affect UAM's costs of operations
chiefly through increasing or decreasing the interest expense related to the
Company's variable-rate debt outstanding. To mitigate the risks associated with
increases in interest rates, UAM has entered into and plans to continue to enter
into interest-rate protection agreements (see Notes 1 and 3 to the Consolidated
Financial Statements included in this Annual Report). Rates of interest on the
Senior Notes and existing subordinated debt are fixed. Increases and decreases
in interest rates may also affect market prices of assets managed by the
Company's affiliated firms. Changes in such prices may affect the affiliated
firms' revenues, and therefore UAM's consolidated revenues.
EFFECTS OF INFLATION
The Company's business is not capital intensive. Management believes that
financial results as reported would not be significantly affected had such
results been adjusted to reflect the effects of inflation and price changes.
FORWARD-LOOKING STATEMENTS
Certain statements within this Annual Report filed under Form 10-K, in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and in other written or oral communications made by or
with the approval of an authorized executive officer of the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words or phrases "can be," "expects," "may
affect," "may depend," "believes," "estimate," "project" and similar words and
phrases are intended to identify such forward-looking statements.
<PAGE>
- --------------------------------------------------------------------------------
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performances or
achievements of the Company to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. Some of these risks, uncertainties and other factors are: changes in
domestic and foreign economic and market conditions, effects of client cash
flow, impairment of acquired client contracts, competition in the investment
management industry, and other factors as more thoroughly identified and
explained in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 filed with the Securities and Exchange Commission.
Because of such risks, uncertainties and other factors, the Company cautions
each person receiving such forward-looking statements not to place undue
reliance on any such statements. All such forward-looking statements are current
only as of the date and time they are made. The Company has no obligation, and
will not undertake, to release publicly any revisions to such forward-looking
statements (for example, to reflect events or circumstances occurring after the
date and time such statements were made, or to reflect events or circumstances
that were not anticipated at the date and time such statements were made).
YEAR 2000
The Company has and will continue to make certain investments in its software
systems and applications to ensure that the Company is fully compliant with Year
2000 computer-related issues. The financial impact to the Company has not been
and is not anticipated to be material.
<PAGE>
Eleven-Year Review
UNITED ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
(In thousands, unless otherwise
indicated, except per-share amounts) 1997 1996 (2) 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 941,621 $ 883,267 $ 734,353 $ 521,369 $ 476,729 $ 396,074
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation and related expenses 470,372 431,877 362,516 261,031 237,403 200,884
Amortization of cost assigned to
contracts acquired 105,242 101,935 93,192 55,121 48,493 37,279
Other operating expenses 163,927 138,450 115,454 86,895 78,537 70,650
Reduction in value of
intangible assets (1) 170,982 - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
910,523 672,262 571,162 403,047 364,433 308,813
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 31,098 211,005 163,191 118,322 112,296 87,261
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense, net and
other amortization 38,321 39,757 44,181 12,829 15,328 16,232
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) (7,223) 171,248 119,010 105,493 96,968 71,029
Income tax expense (benefit) (3,090) 73,426 51,754 45,108 41,989 30,298
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,133) $ 97,822 $ 67,256 $ 60,385 $ 54,979 $ 40,731
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share $(.06) $1.43 $.99 $.95 $.92 $.76
Diluted earnings (loss) per share $(.06) $1.36 $.95 $.90 $.84 $.68
DIVIDENDS DECLARED PER SHARE $ .77 $ .66 $.58 $.50 $.42 $.34
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Operating Cash Flow (3) $ 213,652 $ 211,371 $ 169,008 $ 121,979 $ 109,552 $ 83,681
Assets under management at
end of year (in millions) $ 197,489 $ 171,027 $ 151,606 $ 111,507 $ 106,082 $ 90,240
BALANCE SHEET DATA
Total assets $1,513,500 $1,449,049 $1,419,031 $ 947,598 $ 708,412 $ 658,900
Cost assigned to contracts
acquired, net $1,018,172 $ 959,886 $1,055,676 $ 674,526 $ 480,101 $ 460,523
Long-term debt (including
current portion) $ 773,392 $ 610,967 $ 680,300 $ 369,268 $ 216,230 $ 275,110
Total stockholders' equity $ 458,152 $ 552,244 $ 491,769 $ 406,158 $ 358,301 $ 288,751
Number of common shares
outstanding at end of year 69,257 68,711 67,540 63,772 61,530 56,986
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands, unless otherwise
indicated, except per-share amounts) 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 324,772 $ 268,022 $ 227,745 $ 189,839 $ 169,790
- --------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation and related expenses 163,054 130,095 108,595 86,789 80,594
Amortization of cost assigned to
contracts acquired 30,535 27,157 23,808 21,387 14,398
Other operating expenses 58,825 57,665 43,446 39,951 36,752
Reduction in value of
intangible assets (1) - - - - -
- --------------------------------------------------------------------------------------------------------------
252,414 214,917 175,849 148,127 131,744
- --------------------------------------------------------------------------------------------------------------
Operating income 72,358 53,105 51,896 41,712 38,046
- --------------------------------------------------------------------------------------------------------------
Interest expense, net and
other amortization 17,040 13,158 13,166 13,203 7,275
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) 55,318 39,947 38,730 28,509 30,771
Income tax expense (benefit 22,936 16,664 15,107 11,380 13,278
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 32,382 $ 23,283 $ 23,623 $ 17,129 $ 17,493
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share $.65 $.48 $.51 $.36 $.39
Diluted earnings (loss) per share $.58 $.44 $.45 $.34 $.37
DIVIDENDS DECLARED PER SHARE $.28 $.22 $.17 $.13 $.09
- --------------------------------------------------------------------------------------------------------------
OPERATING DATA
Operating Cash Flow (3) $ 67,572 $ 54,772 $ 51,416 $ 42,954 $ 35,744
Assets under management
at end of year (in millions) $ 76,182 $ 58,123 $ 53,319 $ 40,628 $ 35,795
BALANCE SHEET DATA
Total assets $ 532,610 $ 461,626 $ 406,952 $ 345,747 $ 299,133
Cost assigned to contracts
acquired, net $ 343,421 $ 320,940 $ 292,199 $ 258,804 $ 187,507
Long-term debt (including
current portion) $ 208,475 $ 190,635 $ 157,459 $ 133,541 $ 75,050
Total stockholders' equity $ 226,904 $ 190,185 $ 175,528 $ 160,359 $ 162,420
Number of common shares
outstanding at end of year 50,926 47,986 46,518 46,436 46,410
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduction in value of intangible assets of approximately $170,982,000 was
charged to operating expenses ($99,347,000 net of taxes), or $1.37 to loss
per share.
(2) Nonrecurring gains contributed approximately $12,000,000 to revenues and
$.10 to earnings per share.
(3) Net income (loss) plus amortization, depreciation and the reduction in
value of intangible assets, net of taxes.
<PAGE>
Consolidated Balance Sheet
UNITED ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 173,638,000 $ 248,399,000
Investment advisory fees receivable 180,921,000 149,843,000
Other current assets 11,863,000 11,713,000
- -------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 366,422,000 409,955,000
Fixed assets, net 41,110,000 30,297,000
Cost assigned to contracts acquired, net of
accumulated amortization of $743,795,000
in 1997 and $467,571,000 in 1996 1,018,172,000 959,886,000
Other assets 87,796,000 48,911,000
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,513,500,000 $ 1,449,049,000
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 118,249,000 $ 113,718,000
Accrued compensation 143,633,000 116,005,000
Current portion of notes payable 137,000 3,481,000
- -------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 262,019,000 233,204,000
Senior notes payable 514,843,000 150,000,000
Subordinated notes payable 258,412,000 457,486,000
Deferred income taxes 20,074,000 56,115,000
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,055,348,000 896,805,000
- -------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized - 200,000,000 shares
Issued - 70,346,577 shares in 1997 and
69,217,426 shares in 1996 703,000 692,000
Capital in excess of par value 357,239,000 346,017,000
Retained earnings 128,922,000 217,703,000
- -------------------------------------------------------------------------------------
486,864,000 564,412,000
Less treasury shares at cost - 1,089,548
shares in 1997 and 506,046 in 1996 (28,712,000) (12,168,000)
- -------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 458,152,000 552,244,000
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,513,500,000 $ 1,449,049,000
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statement of Operations
UNITED ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 941,621,000 $ 883,267,000 $ 734,353,000
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation and related expenses 470,372,000 431,877,000 362,516,000
Amortization of cost assigned to
contracts acquired 5,242,000 101,935,000 93,192,000
Other operating expenses 163,927,000 138,450,000 15,454,000
Reduction in value of intangible assets 170,982,000 - -
- ----------------------------------------------------------------------------------------------------
910,523,000 672,262,000 571,162,000
- ----------------------------------------------------------------------------------------------------
Operating income 31,098,000 211,005,000 163,191,000
- ----------------------------------------------------------------------------------------------------
NON-OPERATING EXPENSES:
Interest expense, net 35,879,000 37,523,000 42,486,000
Other amortization 2,442,000 2,234,000 1,695,000
- ----------------------------------------------------------------------------------------------------
38,321,000 39,757,000 44,181,000
- ----------------------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) (7,223,000) 171,248,000 119,010,000
Income tax expense (benefit) (3,090,000) 73,426,000 51,754,000
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,133,000) $ 97,822,000 $ 67,256,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $(.06) $1.43 $.99
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $(.06) $1.36 $.95
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statement of Cash Flows
UNITED ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,133,000) $ 97,822,000 $ 67,256,000
Adjustments to reconcile net income (loss) to net
cash flow from operating activities:
Amortization of cost assigned to
contracts acquired 105,242,000 101,935,000 93,192,000
Depreciation 10,754,000 9,380,000 6,865,000
Other amortization 2,442,000 2,234,000 1,695,000
Reduction in value of intangible assets,
net of taxes 99,347,000 - -
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PLUS AMORTIZATION, DEPRECIATION
AND THE REDUCTION IN VALUE OF INTANGIBLE
ASSETS, NET OF TAXES 213,652,000 211,371,000 169,008,000
Changes in assets and liabilities:
Increase in investment advisory fees receivable (35,970,000) (14,234,000) (48,732,000)
Decrease (increase) in other current assets (43,000) 2,446,000 (507,000)
Increase in accounts payable and accrued
expenses 7,134,000 16,512,000 30,213,000
Increase in accrued compensation 27,795,000 28,965,000 37,745,000
Increase (decrease) in deferred income taxes 919,000 (6,887,000) 7,188,000
- ------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES 213,487,000 238,173,000 194,915,000
- ------------------------------------------------------------------------------------------------------------------------
Cash flow from (used in) investing activities:
Purchase of fixed assets (21,715,000) (10,897,000) (13,937,000)
Cash additions to cost assigned to
contracts acquired (152,068,000) (292,000) (43,582,000)
Change in other assets (8,866,000) 10,291,000 (1,283,000)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW USED IN INVESTING ACTIVITIES (182,649,000) (898,000) (58,802,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash flow from (used in) financing activities:
Purchase of treasury shares (76,411,000) (43,718,000) (48,819,000)
Additions to notes payable 303,161,000 61,750,000 268,175,000
Reductions in notes payable (313,619,000) (117,597,000) (295,435,000)
Issuance or reissuance of equity securities 29,029,000 22,743,000 10,494,000
Dividends paid (51,543,000) (40,204,000) (35,650,000)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW USED IN FINANCING ACTIVITIES (109,383,000) (117,026,000) (101,235,000)
- ------------------------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON
CASH FLOW 3,784,000 2,702,000 (390,000)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (74,761,000) 122,951,000 34,488,000
Cash and cash equivalents at beginning of year 248,399,000 125,448,000 90,960,000
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 173,638,000 $ 248,399,000 $ 125,448,000
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
UNITED ASSET MANAGEMENT CORPORATION
<TABLE>
<CAPTION>
COMMON CAPITAL IN TREASURY
SHARES STOCK AT EXCESS OF RETAINED TREASURY SHARES
ISSUED PAR VALUE PAR VALUE EARNINGS SHARES AT COST
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 64,152,566 $ 359,000 $255,556,000 $156,798,000 (379,452) $(6,555,000)
Issuance of stock 3,746,008 19,000 67,351,000 --- --- ---
Exercise of stock options
and warrants 1,318,852 6,000 17,530,000 (7,229,000) 1,304,122 23,870,000
Issuance of warrants --- --- 1,502,000 --- --- ---
Purchase of treasury shares --- --- --- --- (2,601,600) (48,819,000)
Net income --- --- --- 67,256,000 --- ---
Dividends declared
($.58 per share) --- --- --- (35,275,000) --- ---
Dividends declared by pooled
companies --- --- --- (375,000) --- ---
Foreign currency translation
adjustment --- --- --- (225,000) --- ---
Two-for-one common stock split --- 308,000 (308,000) --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1995 69,217,426 692,000 341,631,000 180,950,000 (1,676,930) (31,504,000)
Exercise of stock options
and warrants --- --- 4,284,000 (21,302,000) 3,113,184 63,054,000
Issuance of warrants --- --- 102,000 --- --- ---
Purchase of treasury shares --- --- --- --- (1,942,300) (43,718,000)
Net income --- --- --- 97,822,000 --- ---
Dividends declared
($.66 per share) --- --- --- (42,729,000) --- ---
Foreign currency translation
adjustment --- --- --- 2,962,000 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1996 69,217,426 692,000 346,017,000 217,703,000 (506,046) (12,168,000)
Exercise of stock options
and warrants 1,129,151 11,000 9,928,000 (25,852,000) 2,284,398 59,867,000
Issuance of warrants --- --- 1,294,000 --- --- ---
Purchase of treasury shares --- --- --- --- (2,867,900) (76,411,000)
Net loss --- --- --- (4,133,000) --- ---
Dividends declared
($.77 per share) --- --- --- (53,713,000) --- ---
Foreign currency translation
adjustment --- --- --- (5,083,000) --- ---
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 70,346,577 $ 703,000 $357,239,000 $128,922,000 (1,089,548) $(28,712,000)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The principal business activities of United Asset Management Corporation (the
Company) are investment advisory services, primarily for institutional clients,
and the acquisition of institutional investment management firms. The Company's
wholly owned subsidiaries operate in one business segment, that is, as
investment advisers, managing both domestic and international investment
portfolios for corporate benefit plans, mutual funds, government and union
benefit plans, individuals, endowments, and foundations. While the Company's
subsidiaries primarily specialize in the management of U.S. equities, bonds and
cash, other asset classes under management include international securities,
real estate and stable value assets.
The Company has arrangements with its subsidiaries and certain of their
principal officers to share revenues (revenue sharing plans). Under these
revenue sharing plans, the subsidiaries are entitled to use a portion
(determined by formula) of their revenues to meet all their operating expenses,
including compensation, at the discretion of the subsidiaries' management. The
remaining portion of those revenues is used by the Company to meet its operating
and cash flow needs. All operating expenses incurred by the subsidiaries are
charged to operations and reported as compensation and related expenses or as
other operating expenses in these consolidated financial statements.
CONSOLIDATION
The Company's consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Inter-company balances and transactions
have been eliminated.
REVENUE RECOGNITION
The majority of the Company's revenues are derived from investment advisory fees
that are normally accrued over the period in which services are performed. Any
fees collected in advance are deferred and recognized as income over the period
earned. Transaction-based fees are recognized when all contractual obligations
have been satisfied. All investment advisory fees receivable are expected to be
collected.
FIXED ASSETS AND DEPRECIATION
Equipment and other fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of
the lease.
COST ASSIGNED TO CONTRACTS ACQUIRED AND GOODWILL
The purchase price for the acquisition of a firm acquired in a business
combination accounted for as a purchase transaction is allocated based on the
fair value of the net assets acquired, primarily investment advisory contracts.
The cost assigned to contracts acquired is amortized using the straight-line
method over periods ranging from five to 20 years. These lives represent the
estimated weighted average lives of the contracts acquired and are based
generally on the historical experience of the individual companies acquired. The
estimated remaining weighted average lives of contracts acquired are
periodically reevaluated. If experience after the acquisition indicates that the
estimate of the average remaining lives should be shortened, the cost assigned
to contracts acquired will be amortized over the shorter life commencing in the
year in which the new estimate is determined.
Amounts paid to certain key employees for entering into long-term employment
contracts and noncompetition agreements at the time of purchase business
combinations are included in cost assigned to contracts acquired and are
amortized on a straight-line basis over the lives of such arrangements.
<PAGE>
- --------------------------------------------------------------------------------
Purchase price in excess of the fair value of the net assets acquired is
recorded as goodwill and amortized using the straight-line method over 40 years.
Goodwill, net of accumulated amortization, was $59,144,000 and $20,157,000 at
December 31, 1997 and 1996, respectively, and is included in other assets in the
accompanying consolidated balance sheet.
The Company evaluates its long-lived assets for impairment when circumstances
indicate that the carrying value of such assets may not be fully recoverable.
Such an evaluation compares the carrying value of the asset against the
estimated undiscounted future cash flows associated with the asset. If the
evaluation indicates that the undiscounted future cash flows are not sufficient
to recover the carrying value of the asset, the asset is adjusted to its
estimated fair value. During the fourth quarter of 1997, due to a projected
decline in revenues at two affiliates, the Company recorded a noncash reduction
in value of intangible assets to reflect an impairment of the cost assigned to
contracts acquired. The Company estimated the fair value of the contracts based
on estimated discounted future cash flow projections. The total impairment was
$170,982,000 ($99,347,000 net of taxes).
RETIREMENT AND PENSION PLANS
The Company has certain retirement and pension plans which cover eligible
employees of the Company and its subsidiaries. All plans are defined
contribution retirement plans, with the exception of a defined benefit pension
plan maintained by a non-U.S. subsidiary. The expense related to all plans was
$11,780,000, $10,428,000 and $11,039,000 in 1997, 1996 and 1995, respectively.
The defined benefit pension plan has an excess of plan assets over plan
obligations. Excess plan assets and pension expense relating to this plan are
not significant in relation to the Company's consolidated financial statements.
STOCK-BASED COMPENSATION PLANS
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123), the Company accounts for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). (See Note 5.)
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS
128), became effective for financial statements issued for annual periods ending
after December 15, 1997, including interim periods, and requires restatement of
all prior-period earnings-per-share data. FAS 128 replaced Accounting Principles
Board Opinion No. 15 and requires dual presentation of basic and diluted
earnings per share for all entities with complex capital structures. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share is computed by giving effect to all dilutive
potential common shares that were outstanding during the period. All historical
per-share information has been restated to reflect FAS 128.
CASH AND CASH EQUIVALENTS
Cash equivalents represent highly liquid investments purchased with a remaining
maturity of three months or less. The Company invests its excess cash in
deposits with major banks, money market funds or in securities composed
primarily of commercial paper of companies with strong credit ratings in
diversified industries. At December 31, 1997 and 1996, cash equivalents included
$10,628,000 and $89,483,000, respectively, of short-term interest-bearing debt
securities, which were classified as held to maturity and for which cost
approximated fair value.
<PAGE>
- --------------------------------------------------------------------------------
FOREIGN OPERATIONS
The Company conducts operations in the U.S. and certain foreign locations. In
1997, revenues, operating income and assets of foreign operations represented
$76,664,000, $17,559,000 and $181,265,000, respectively.
The financial statements of all non-U.S. subsidiaries are translated into U.S.
dollars as follows: assets and liabilities at year-end exchange rates; income,
expenses and cash flows at average exchange rates; and stockholders' equity at
historical exchange rates. The resulting translation adjustment is recorded as a
component of stockholders' equity.
INTEREST-RATE PROTECTION AGREEMENTS
The Company periodically enters into interest-rate protection agreements to
reduce the potential impact of interest-rate increases associated with the
Company's outstanding borrowings. Premiums paid for these instruments are
amortized as interest expense over the terms of the agreements. Any amounts
receivable under these agreements are recorded as a reduction of interest
expense.
DEFERRED INCENTIVE COMPENSATION PLAN
The Company has a deferred incentive compensation plan for employees of
affiliates that is based on each affiliate's growth. The deferred compensation
is payable over seven years and is subject to increases or decreases in value
during that period based on performance. The expense of this incentive plan is
recorded over the period in which the incentive compensation is earned.
USE OF ESTIMATES AND RECLASSIFICATIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts and disclosures reported in the accompanying consolidated
financial statements. Certain reclassifications have been made to the 1996
balance sheet to conform with the current year's presentation.
NOTE 2--FIXED ASSETS AND LEASE OBLIGATIONS
Fixed assets, which have estimated useful lives up to 10 years, consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Equipment, leasehold improvements and
other fixed assets $89,841,000 $70,337,000
Accumulated depreciation and amortization (48,731,000) (40,040,000)
- --------------------------------------------------------------------------------
$41,110,000 $30,297,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, future minimum rentals for operating leases that had
initial or noncancelable lease terms in excess of one year were payable as
follows:
<TABLE>
<CAPTION>
REQUIRED
MINIMUM
YEAR ENDED DECEMBER 31, PAYMENT
- ---------------------------------------------------------------------------
<S> <C>
1998 $24,934,000
1999 $22,294,000
2000 $20,552,000
2001 $18,625,000
2002 $15,640,000
Thereafter $27,594,000
</TABLE>
Rent expense for 1997, 1996 and 1995 approximated $24,475,000, $21,361,000 and
$20,179,000, respectively.
<PAGE>
- ---------------------------------------------------------------------------
NOTE 3--NOTES PAYABLE
The Company has a Reducing Revolving Credit Agreement (the Credit Agreement)
with a group of banks whereby the Company may borrow, prepay and reborrow up to
$500,000,000 through April 19, 2001. Any principal amount of borrowings
outstanding under the Credit Agreement will be due and payable at that date. At
December 31, 1997, $303,000,000 were outstanding under the Credit Agreement. The
Company had no borrowings outstanding under the Credit Agreement at December 31,
1996.
As of December 31, 1997, an annual commitment fee of .17% is payable on the
daily average unused portion of the Credit Agreement. Interest rates available
for amounts outstanding under this arrangement are currently: prime, .55% over
LIBOR, .675% over certain certificate of deposit rates, or a money market bid
option. Under the money market bid option, the Company can borrow up to
$50,000,000 from members of its banking group at prevailing money market rates;
any such borrowings reduce the commitment under the Credit Agreement.
The Company has an additional $150,000,000 in Senior Notes outstanding with a
group of institutional investors. The Senior Notes bear interest at a fixed rate
of 7.12% and mature in accordance with a scheduled payment plan calling for
equal annual payments beginning August 25, 2000 and ending August 25, 2005.
Under the terms of the Senior Notes and the Credit Agreement, the Company is
required to meet certain financial covenants, including covenants restricting
dividends and repurchase of the Company's common stock, and requiring the
Company to maintain minimum net worth, as defined. The Company must also
continue to maintain certain minimum working capital, cash flow and
debt-to-equity ratios. Borrowings under both the Senior Notes and the Credit
Agreement are secured by the stock of the Company's subsidiaries.
At December 31, 1997, the Company was a party to interest-rate protection
agreements entered into with certain members of the Company's banking group,
which extend up to four years and limit interest rates to an average of 8.1%.
The notional principal amount of debt covered by these arrangements over their
remaining lives ranges from $15,000,000 to $275,000,000. Unamortized premiums
outstanding were $712,000 and $1,363,000 at December 31, 1997 and 1996,
respectively. These amounts approximate the fair market value of the agreements.
Amortization of premiums, which is included in interest expense, was $960,000,
$1,381,000 and $1,477,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Currently, the Company mitigates the credit risk associated with
interest-rate protection agreements by entering into these arrangements only
with members of the group of banks who are party to the Credit Agreement. The
Company monitors the credit standing of these counterparties on a continuous
basis.
At December 31, 1997 and 1996, the Company also had $258,549,000 and
$460,967,000, respectively, of subordinated notes outstanding. These notes
primarily represent a portion of the consideration paid to selling shareholders
of businesses acquired, the majority of whom remain employed by the Company's
subsidiaries after the date of acquisition. The notes mature at various dates
through 2005, and as of December 31, 1997, have interest rates ranging from 5.5%
to 8.5%. The notes outstanding may be tendered upon the exercise of warrants
issued in conjunction with the notes. In connection with the exercise of
warrants through the tender of subordinated notes, subordinated debt of
$11,391,000, $19,375,000 and $23,676,000 was extinguished in 1997, 1996 and
1995, respectively. In addition, during 1997, subordinated notes totaling
$313,619,000 were paid in cash. The Company intends to finance subordinated debt
that becomes due which has not been tendered in connection with the exercise of
warrants by utilizing its Credit Agreement. As such, the $27,851,000 of
subordinated notes due in 1998 have been included in the payments due in 2001,
the year the line of credit expires.
<PAGE>
- ---------------------------------------------------------------------------
The aggregate cash repayments of all outstanding borrowings during the five
years after December 31, 1997 total the following amounts:
<TABLE>
<CAPTION>
REQUIRED
MINIMUM
YEAR ENDED DECEMBER 31, PAYMENT
- ---------------------------------------------------------------------------
<S> <C>
1998 $137,000
1999 $21,015,000
2000 $30,073,000
2001 $510,911,000
2002 $84,381,000
</TABLE>
The recorded cost of the Senior Notes approximates fair value. Due to the unique
nature of each of the subordinated debt instruments issued to the sellers of
firms, the assessment of current fair value is not practicable.
Included in accounts payable and accrued expenses at December 31, 1997 and 1996
were accrued interest of $11,981,000 and $16,941,000, respectively. Interest
expense and interest paid for each of the three years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $43,156,000 $43,289,000 $45,880,000
Interest paid $47,156,000 $51,272,000 $23,039,000
</TABLE>
NOTE 4--STOCKHOLDERS' EQUITY
In 1996, the Company issued 7,586,402 shares of common stock to effect
acquisitions accounted for as poolings of interests. In 1995, the Company issued
3,746,008 shares of common stock in connection with acquisitions accounted for
as purchases. The Company issued 1,097,566, 62,010 and 2,718,076 warrants during
1997, 1996 and 1995, respectively, to effect acquisitions accounted for as
purchases.
The Company has a program to systematically repurchase shares of its common
stock to meet the requirements for future issuance of shares upon the exercise
of stock options and warrants. Since the program began in 1987, 14,060,034
shares of common stock have been repurchased at a cost of $227,174,000, and as
of December 31, 1997, all but 1,089,548 shares had been reissued from treasury
upon the exercise of stock options and warrants. In January 1998, the Company's
directors increased the number of shares authorized for repurchase from
16,000,000 to 24,000,000 shares.
Included in accounts payable and accrued expenses at December 31, 1997 and 1996
were dividends payable of $13,851,000 and $11,681,000, respectively.
At December 31, 1997, the following warrants were outstanding at a weighted
average exercise price of $23.03 per share:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION SHARES ISSUABLE RANGE OF EXERCISE PRICES
- ------------------------------------------------------------------------------
<S> <C> <C>
1998 162,232 $11.50-14.50
1999 1,162,844 $16.50-17.50
2000 240,840 $14.50-16.50
2001 3,868,076 $14.50-28.75
2002 2,559,434 $19.50-28.75
2003 59,565 $23.00
2004 1,097,566 $23.00-34.00
---------
9,150,557
---------
---------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
The Company is authorized to issue 5,000,000 shares of $1.00 par value preferred
stock, none of which had been issued through December 31, 1997.
NOTE 5--STOCK OPTION PLANS
During 1997, the Company adopted the Amended and Restated 1994 Stock Option Plan
whereby the Board of Directors is authorized to grant options for the purchase
of 11,900,000 shares of the Company's common stock to directors, officers and
other key employees of the Company and its subsidiaries. The exercise price of
the options granted to officers and other key employees is not less than the
fair market value of the Company's common stock at the date of the grant. These
options expire five years from the date of the grant and may not be exercised
for one year from the date of the grant. Thereafter, they may be exercised
ratably over the ensuing four years.
Each eligible director is granted 14,000 options annually for the purchase of
shares of the Company's common stock at the fair market value at the date of the
grant. In addition, eligible directors may also elect to receive discounted
options in lieu of a portion of their directors' fees. In 1997, 98,000 shares
were granted under the annual provision and 6,968 discounted options were issued
in lieu of directors' fees. These options expire five years from the date of the
grant.
The Company applies APB 25 in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for such plans. Had
compensation cost for the Company's plans been determined based on the fair
value of the awards at the grant dates, consistent with the methodology
prescribed by FAS 123, the Company's net income (loss) and earnings (loss) per
share, including tax effects if any, would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(9,277,000) $94,932,000 $65,921,000
Basic earnings (loss) per share $(.13) $1.39 $.97
Diluted earnings (loss) per share $(.13) $1.33 $.93
</TABLE>
During the initial phase-in period of FAS 123, pro forma disclosures may not be
representative of the effects on reported net income (loss) and earnings (loss)
per share for future years because the FAS 123 method of accounting has not been
applied to options granted prior to January 1, 1995.
The fair value of each option grant is estimated on the date of each grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for options granted in 1997, 1996 and 1995, respectively:
expected life of 4.5 years for all years; stock price volatility of 22.1, 23.9
and 25.9 percent; risk-free interest rates of 6.3, 5.7, and 7.0 percent; and
dividend yield of 2.6, 2.9, and 2.8 percent. The weighted-average fair value of
options granted during 1997, 1996 and 1995 was $6.08, $4.55 and $4.75,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
A summary of the Company's stock option plans as of December 31, 1997, 1996 and
1995, and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 6,575,660 $13.89
Options granted 1,753,912 $18.38
Options exercised (877,190) $10.66
Options canceled (239,960) $18.05
-----------
Balance, December 31, 1995 7,212,422 $15.23 3,026,974 $11.94
Options granted 1,658,644 $20.72
Options exercised (1,693,498) $13.77
Options canceled (159,372) $17.79
-----------
Balance, December 31, 1996 7,018,196 $16.83 3,015,657 $13.83
Options granted 2,047,125 $26.90
Options exercised (2,102,764) $11.86
Options canceled (203,446) $21.19
-----------
Balance, December 31, 1997 6,759,111 $21.29 2,558,059 $18.79
-----------
-----------
</TABLE>
At December 31, 1997, the Company had 6,220,703 options available for future
grants. Shares reserved but unissued at December 31, 1997 and 1996 were
12,979,814 and 9,609,892, respectively.
The following table summarizes information about all stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF AVERAGE NUMBER OF AVERAGE
YEAR OF EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
EXPIRATION PRICES OUTSTANDING PRICE EXERCISABLE PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $14.50-23.19 576,692 $16.46 576,692 $16.46
1999 $13.41-20.38 1,296,378 $18.52 867,181 $18.56
2000 $13.36-19.94 1,436,275 $18.40 660,843 $18.35
2001 $18.19-26.75 1,437,964 $20.74 355,343 $21.24
2002 $21.09-29.50 2,011,802 $26.90 98,000 $28.50
--------- ---------
$13.36-29.50 6,759,111 $21.29 2,558,059 $18.79
--------- ---------
--------- ---------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6--INCOME TAXES
Income taxes for financial reporting purposes are recorded in accordance with an
asset and liability approach which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of the Company's assets
and liabilities.
Income (loss) before income tax expense (benefit) was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(27,290,000) $159,436,000 $107,992,000
Foreign 20,067,000 11,812,000 11,018,000
- ----------------------------------------------------------------------------------------------------
$(7,223,000) $171,248,000 $119,010,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Income tax expense (benefit) consisted of the following:
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Current:
Federal $54,910,000 $65,031,000 $33,126,000
State 8,797,000 11,371,000 7,489,000
Foreign 5,027,000 3,911,000 3,951,000
Deferred:
Federal (58,131,000) (5,914,000) 6,143,000
State (13,693,000) (973,000) 1,045,000
- ----------------------------------------------------------------------------------------------------
$(3,090,000) $73,426,000 $51,754,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Deferred income taxes consisted of the following:
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
Deferred tax assets:
Deferred incentive compensation $2,358,000 $1,481,000
Additional contract amortization for book purposes 56,430,000 --
State net operating loss carryforwards 3,523,000 1,853,000
Foreign tax credit carryforwards 5,788,000 5,728,000
Deferred tax assets valuation allowance (3,780,000) (1,842,000)
- ----------------------------------------------------------------------------------------------------
64,319,000 7,220,000
- ----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Additional contract amortization for tax purposes 41,698,000 40,062,000
Contracts acquired in nontaxable transactions 36,692,000 18,396,000
Other 6,003,000 4,877,000
- ----------------------------------------------------------------------------------------------------
84,393,000 63,335,000
- ----------------------------------------------------------------------------------------------------
Net deferred tax liability $20,074,000 $56,115,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1997, the Company had state net operating loss carryforwards of
approximately $32,769,000 which will begin to expire in 2008. Also, at December
31, 1997, the Company had approximately $5,788,000 of foreign tax credit
carryforwards of which $557,000, $791,000, $3,008,000 and $1,432,000 expire in
1998, 1999, 2000 and 2001, respectively.
For purchase acquisitions which occurred prior to the Revenue Reconciliation Act
of 1993 (the Act), the additional contract amortization for income tax purposes
results from the application of a method under which the deductions for income
tax purposes are determined by: (1) amortizing the cost assigned to contracts
acquired on a straight-line basis over the same estimated useful lives as those
used for financial reporting purposes; and (2) deducting the unamortized balance
of such cost which is allocated to an individual contract when the contract is
terminated. For acquisitions after the Act, the deduction for income tax
purposes is determined by amortizing the cost assigned to contracts acquired on
a straight-line basis over a 15-year period, with no deduction for the
unamortized balance of individual contract terminations.
The effective income tax rate differed from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax statutory rate (35)% 35% 35%
State income taxes, net of federal benefit (15) 5 5
Foreign tax rate differential (11) -- --
Nondeductible items and other 18 3 3
- --------------------------------------------------------------------------------
(43)% 43% 43%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Excluding the effect of the 1997 charge reducing the value of intangible assets,
the percentages presented above for 1997 would have been similar to those
reported for 1996 and 1995. Income taxes of $76,761,000, $61,536,000 and
$41,538,000 were paid in 1997, 1996 and 1995, respectively.
The Company's federal income tax returns for the years ending December 31, 1984
through December 31, 1992 are under audit by the Internal Revenue Service. The
Company received a Revenue Agent's Report on December 27, 1996 proposing certain
adjustments for these years. The principal issue raised in the Report is the
amount of deductions claimed by the Company for amortization of the cost of
acquired investment management contracts. The Company is appealing the results
of the audit to the Appellate Division of the Internal Revenue Service.
Previously, in a 1992 Revenue Agent's Report covering the years ending December
31, 1984, 1985 and 1986, the Internal Revenue Service challenged the Company's
practice of deducting the amortization of cost assigned to acquired investment
management contracts on the premise that no part of these costs could be
amortized and deducted because such assets were in the nature of nonamortizable
goodwill. The Revenue Agent's Report received in 1996 agrees with the Company's
position that costs properly assigned to acquired contracts are amortizable and
deductible, but proposes adjustments to the Company's valuation of the acquired
contracts. If the adjustments proposed in the Revenue Agent's Report were upheld
in their entirety, the Company's additional liability for federal income tax for
the years 1984 through 1992 would approximate $56,000,000, plus statutory
interest thereon. Management and its advisors believe that there are substantial
defects in the Revenue Agent's Report with respect to the valuation of the
acquired contracts and that the audit will be resolved without material adverse
effect on the Company's consolidated financial position, its consolidated
results of operations or its consolidated cash flows.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7--ACQUISITIONS, COMMITMENTS AND OTHER
During 1997, the Company acquired J.R. Senecal & Associates Investment Counsel
Corp., Pacific Financial Research, Inc., and Thomson Horstmann & Bryant, Inc.
through purchase transactions. The Company also acquired an interest in
Lincluden Management Limited. In addition, the Company organized Expertise Asset
Management and Palladyne Asset Management B.V. and acquired InvestLink
Technologies, Inc.
During 1996, the Company issued shares of its common stock to acquire Rogge
Global Partners and Clay Finlay Inc. through transactions accounted for as
poolings of interests. The Company also acquired OSV Partners in a purchase
transaction as well as provided financing for an affiliate, Analytic Investment
Management, Inc., to acquire TSA Capital Management, now called Analytic-TSA
Global Asset Management, Inc.
During 1995, the Company acquired Provident Investment Counsel and Pilgrim
Baxter & Associates, Ltd. through purchase transactions.
The purchase price, including direct costs, associated with the acquisitions
accounted for as purchases and the allocations thereof are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consideration:
Cash $160,167,000 $651,000 $52,295,000
Notes payable 105,176,000 -- 356,893,000
Common stock and warrants 1,294,000 -- 68,872,000
- ----------------------------------------------------------------------------------------------------
$266,637,000 $651,000 $478,060,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Allocation of purchase price:
Net tangible assets $1,562,000 $ -- $9,336,000
Cost assigned to contracts acquired 258,492,000 251,000 468,724,000
Other assets 6,583,000 400,000 --
- ----------------------------------------------------------------------------------------------------
$266,637,000 $651,000 $478,060,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
In conjunction with a nontaxable 1997 acquisition, goodwill and a deferred tax
liability of $35,844,000 were recorded in purchase accounting related to the
cost of contracts capitalized for financial reporting purposes.
The results of operations of J.R. Senecal & Associates Investment Counsel,
InvestLink Technologies, Expertise Asset Management, Pacific Financial Research,
Thomson Horstmann & Bryant, Lincluden Management Limited and Palladyne Asset
Management are included in the consolidated results of operations of the Company
from their respective dates of acquisition: January 7, 1997, February 6, 1997,
May 22, 1997, May 29, 1997, June 6, 1997, September 4, 1997, and December 3,
1997.
At December 31, 1997, a total of $79,098,000 was accrued in senior notes payable
and subordinated notes payable and capitalized to cost assigned to contracts
acquired in connection with additional purchase price commitments that are
payable in 1998 to the former owners of two affiliates. During the first quarter
of 1998, 78% of this amount will be paid in cash, 17% will be issued in the
Company's common stock, and 5% will be issued as subordinated notes.
At December 31, 1996, $12,500,000 was accrued in connection with an additional
purchase price commitment that was paid in 1997 to the former owners of an
affiliate. Of this amount, $6,250,000 was paid in cash and the remainder was
issued as subordinated notes.
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1995, $7,940,000 was accrued in connection with additional
purchase price commitments that were paid in 1996 to the former owners of
affiliates. Of this amount, $6,470,000 was paid in cash and the remainder was
issued as subordinated notes.
In conjunction with certain acquisitions, employment arrangements and incentive
plans, the Company is contingently liable to make payments totaling as much as
$144,000,000 related to acquisitions and employment agreements, and $25,000,000
related to incentive plans. These payments may be in the form of cash and
subordinated notes on dates through 2004 and are dependent upon the achievement
and maintenance of stipulated performance measures.
The 1996 results included nonrecurring revenues approximating $12,000,000 which
primarily related to the redemption of the Company's minority interest in
Aldrich Eastman Waltch. Diluted earnings per share would have been $1.26 and
$.37 for the year and quarter ended December 31, 1996, respectively, had these
non-recurring items not occurred.
Unaudited pro forma data for the years ended December 31, 1997, 1996 and 1995
are set forth below, giving consideration to the acquisition activity in the
respective three-year period, assuming revenue sharing plans (see Note 1) had
been in effect and after certain other pro forma adjustments have been made.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $964,756,000 $930,054,000 $793,292,000
Net income (loss) $(4,758,000) $104,717,000 $78,136,000
Basic earnings (loss) per share $(.07) $1.53 $1.15
Diluted earnings (loss) per share $(.07) $1.45 $1.10
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
To the Board of Directors and Stockholders of United Asset Management
Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of United Asset Management Corporation and its subsidiaries at December
31, 1997 and 1996, and the 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. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
COMMON STOCK INFORMATION
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
The Company's common stock is listed on the New York Stock Exchange. Presented
below are the high, low and closing quarterly stock prices for 1996 and 1997, as
reported on the New York Stock Exchange composite tape, together with quarterly
dividends declared.
Ticker Symbol: UAM
<TABLE>
<CAPTION>
DIVIDEND
HIGH LOW CLOSE DECLARED
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER, 1996 $23 5/16 $18 3/16 $23 3/16 $.160
SECOND QUARTER, 1996 $25 1/8 $21 3/4 $24 $.160
THIRD QUARTER, 1996 $25 1/8 $21 3/4 $23 5/8 $.170
FOURTH QUARTER, 1996 $27 5/8 $23 1/4 $26 5/8 $.170
- -----------------------------------------------------------------------------
FIRST QUARTER, 1997 $29 1/8 $25 5/8 $25 5/8 $.185
SECOND QUARTER, 1997 $28 7/8 $24 1/4 $28 5/16 $.185
THIRD QUARTER, 1997 $28 13/16 $26 $28 11/16 $.200
FOURTH QUARTER, 1997 $30 3/16 $24 1/4 $24 7/16 $.200
</TABLE>
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Unaudited (In thousands, FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
except per-share data) QUARTER QUARTER QUARTER QUARTER(2) QUARTER QUARTER QUARTER QUARTER(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 208,522 $ 206,665 $ 219,618 $ 248,462 $ 215,522 $ 219,572 $ 241,710 $ 264,817
Operating income (loss) $ 45,311 $ 46,653 $ 49,803 $ 69,238 $ 50,452 $ 51,027 $ 51,075 $ (121,456)
Income (loss) before
income tax
expense (benefit) $ 34,256 $ 36,542 $ 40,215 $ 60,235 $ 42,054 $ 42,011 $ 40,693 $ (131,981)
Net income (loss) $ 19,487 $ 20,877 $ 23,005 $ 34,453 $ 24,055 $ 24,030 $ 23,226 $ (75,444)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss)
per share (3) $.29 $.30 $.34 $.50 $.35 $.34 $.33 $(1.09)
Diluted earnings (loss)
per share (3) $.27 $.29 $.32 $.47 $.33 $.33 $.32 $(1.09)
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Cash Flow (4) $ 50,732 $ 48,035 $ 50,475 $ 62,129 $ 51,824 $ 52,722 $ 54,214 $ 54,892
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduction in value of intangible assets of approximately $170,982,000 was
charged to operating expenses ($99,347,000 net of taxes), or $1.37 to loss
per share for the year.
(2) Nonrecurring gains contributed approximately $12,000,000 to revenues and
$.10 to earnings per share.
(3) Under generally accepted accounting principles, when earnings (loss) per
share are computed under the treasury stock method, the total of four
quarters' earnings (loss) per share may not equal the earnings (loss) per
share for the year.
(4) Net income (loss) plus amortization, depreciation and the reduction in
value of intangible assets, net of taxes.
<PAGE>
UNITED ASSET MANAGEMENT CORPORATION Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of Financial
Affiliated Firm Organization Statements
- --------------- ------------ ----------
<S> <C> <C>
Acadian Asset Management, Inc. Massachusetts Consolidated
Analytic-TSA Global Asset Management, Inc. California Consolidated
Barrow, Hanley, Mewhinney & Strauss, Inc. Nevada Consolidated
Cambiar Investors, Inc. Colorado Consolidated
The Campbell Group, Inc. Delaware Consolidated
Chicago Asset Management Company Delaware Consolidated
Clay Finlay Inc. New York Consolidated
Colony Capital Management, Inc. Delaware Consolidated
Cooke & Bieler, Inc. Pennsylvania Consolidated
Dewey Square Investors Corporation Delaware Consolidated
Dwight Asset Management Company Delaware Consolidated
Expertise Asset Management France Consolidated
Fiduciary Management Associates, Inc. Delaware Consolidated
First Pacific Advisors, Inc. Massachusetts Consolidated
GSB Investment Management, Inc. Delaware Consolidated
Hanson Investment Management Company California Consolidated
Heitman Financial Ltd. Delaware Consolidated
Heitman Properties Ltd.(1) Illinois Consolidated
Heitman Capital Management Corporation Illinois Consolidated
Hellman, Jordan Management Company, Inc. Delaware Consolidated
HMH Investment Advisors, Inc. Delaware Consolidated
Investment Counselors of Maryland, Inc. Maryland Consolidated
Investment Research Company Illinois Consolidated
InvestLink Technologies, Inc. New Jersey Consolidated
Jacobs Asset Management Delaware Consolidated
Tom Johnson Investment Management, Inc. Massachusetts Consolidated
L&B Realty Advisors, Inc. (The L&B Group) Delaware Consolidated
L&B Institutional Property Managers, Inc.(2) Delaware Consolidated
L&B Real Estate Counsel Texas Consolidated
Lincluden Management Limited Ontario Consolidated
C.S. McKee & Company, Inc. Pennsylvania Consolidated
Murray Johnstone Limited Scotland Consolidated
Nelson, Benson & Zellmer, Inc. Colorado Consolidated
Northern Capital Management, Inc. Wisconsin Consolidated
NWQ Investment Management Company Massachusetts Consolidated
OSV Partners Delaware Consolidated
Pacific Financial Research, Inc. Massachusetts Consolidated
Palladyne Asset Management B.V. The Netherlands Consolidated
Pell, Rudman & Co., Inc. Delaware Consolidated
Pilgrim Baxter & Associates, Ltd. Delaware Consolidated
Provident Investment Counsel Massachusetts Consolidated
Rice, Hall, James & Associates California Consolidated
Rogge Global Partners Plc United Kingdom Consolidated
Rothschild/Pell, Rudman & Co., Inc. Maryland Consolidated
J. R. Senecal & Associates Investment Counsel Corp. Ontario Consolidated
Sirach Capital Management, Inc. Washington Consolidated
Spectrum Asset Management, Inc. Connecticut Consolidated
Sterling Capital Management Company North Carolina Consolidated
Suffolk Capital Management, Inc. Delaware Consolidated
Thompson, Siegel & Walmsley, Inc. Virginia Consolidated
Thomson Horstmann & Bryant, Inc. Delaware Consolidated
UAM Fund Distributors, Inc. Massachusetts Consolidated
UAM Fund Services, Inc. Delaware Consolidated
UAM Investment Services, Inc. Delaware Consolidated
UAM Retirement Plan Services, Inc. Delaware Consolidated
UAM Shareholder Service Center, Inc. Delaware Consolidated
UAM Trust Company Maryland Consolidated
United Asset Management (Japan), Inc. Delaware Consolidated
</TABLE>
All of the Registrant's subsidiaries do business under the respective names
indicated above and are wholly owned except for Lincluden Management Limited in
which UAM owns a 49% interest.
(1) Heitman Properties Ltd. has 41 property management subsidiaries operating
in the U.S.
(2) L&B Institutional Property Managers, Inc. has seven property management
subsidiaries operating in the U.S.
19
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-63350,
33-52517, 33-57049, 33-64449, 333-11395 and 333-11397) and in the Registration
Statements on Form S-8 (Nos. 33-10621, 33-21756, 33-34288, 33-48858, 33-54233
and 33-28981) of United Asset Management Corporation of our report dated
February 3, 1998 appearing on page 59 of the Annual Report to Stockholders which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page F-1 of this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
March 25, 1998
F-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S YEAR ENDED DECEMBER 31, 1997 CONSOLIDATED STATEMENT OF
OPERATIONS (SEE ANNUAL REPORT PAGE 45) AND THE CONSOLIDATED BALANCE SHEET (SEE
ANNUAL REPORT PAGE 44). THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000796370
<NAME>UNITED ASSET MANAGEMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 173,638
<SECURITIES> 0
<RECEIVABLES> 180,921
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 366,422
<PP&E> 89,841
<DEPRECIATION> 48,731
<TOTAL-ASSETS> 1,513,500<F1>
<CURRENT-LIABILITIES> 262,019
<BONDS> 773,255<F2>
0
0
<COMMON> 703
<OTHER-SE> 457,449
<TOTAL-LIABILITY-AND-EQUITY> 1,513,500
<SALES> 0
<TOTAL-REVENUES> 941,621
<CGS> 0
<TOTAL-COSTS> 634,299
<OTHER-EXPENSES> 276,224<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,321
<INCOME-PRETAX> (7,223)
<INCOME-TAX> (3,090)
<INCOME-CONTINUING> (4,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,133)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
<FN>
<F1>INCLUDES $1,018,172 OF COST ASSIGNED TO CONTRACTS ACQUIRED, NET.
<F2>INCLUDES $514,843 IN SENIOR NOTES PAYABLE AND $258,412 IN SUBORDINATED NOTES
PAYABLE.
<F3>INCLUDES $105,242 OF AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED AND
$170,982 OF REDUCTION IN VALUE OF INTANGIBLE ASSETS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND 1995,
AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995. THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000796370
<NAME> UNITED ASSET MANAGEMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 248,399 125,448
<SECURITIES> 0 0
<RECEIVABLES> 149,843 134,822
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 409,955 274,419
<PP&E> 70,337 62,576
<DEPRECIATION> 40,040 34,148
<TOTAL-ASSETS> 1,449,049<F1> 1,419,031<F1>
<CURRENT-LIABILITIES> 233,204 190,740
<BONDS> 607,486<F2> 673,520<F2>
0 0
0 0
<COMMON> 692 692
<OTHER-SE> 551,552 491,077
<TOTAL-LIABILITY-AND-EQUITY> 1,449,049 1,419,031
<SALES> 0 0
<TOTAL-REVENUES> 883,267 734,353
<CGS> 0 0
<TOTAL-COSTS> 570,327 477,970
<OTHER-EXPENSES> 101,935<F3> 93,192<F3>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 39,757 44,181
<INCOME-PRETAX> 171,248 119,010
<INCOME-TAX> 73,426 51,754
<INCOME-CONTINUING> 97,822 67,256
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 97,822 67,256
<EPS-PRIMARY> $1.43 $.99
<EPS-DILUTED> $1.36 $.95
<FN>
<F1>INCLUDES COST ASSIGNED TO CONTRACTS ACQUIRED, NET, OF $959,886 AND $1,055,676
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, RESPECTIVELY.
<F2>INCLUDES SENIOR NOTES PAYABLE OF $150,000 AND $150,000 AND SUBORDINATED NOTES
PAYABLE OF $457,486 AND $523,520 FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995, RESPECTIVELY.
<F3>REPRESENTS AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 31, JUNE 30 AND
SEPTEMBER 30, 1997, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE, SIX
AND NINE MONTHS ENDED MARCH 31, JUNE 30, AND SEPTEMBER 30, 1997. THIS
INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000796370
<NAME> UNITED ASSET MANAGEMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JUN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 177,177 151,625 164,304
<SECURITIES> 0 0 0
<RECEIVABLES> 143,589 145,374 160,560
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 331,834 307,868 335,235
<PP&E> 73,458 77,520 82,523
<DEPRECIATION> 42,416 44,875 47,545
<TOTAL-ASSETS> 1,387,968<F1> 1,521,269<F1> 1,563,576<F1>
<CURRENT-LIABILITIES> 170,406 199,047 223,295
<BONDS> 595,274<F2> 697,922<F2> 722,942<F2>
0 0 0
0 0 0
<COMMON> 703 703 703
<OTHER-SE> 566,711 569,326 560,186
<TOTAL-LIABILITY-AND-EQUITY> 1,387,968 1,521,269 1,563,576
<SALES> 0 0 0
<TOTAL-REVENUES> 215,522 435,094 676,804
<CGS> 0 0 0
<TOTAL-COSTS> 140,158 283,041 445,901
<OTHER-EXPENSES> 24,912<F3> 50,574<F3> 78,349<F3>
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 8,398 17,414 27,796
<INCOME-PRETAX> 42,054 84,065 124,758
<INCOME-TAX> 17,999 35,980 53,447
<INCOME-CONTINUING> 24,055 48,085 71,311
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 24,055 48,085 71,311
<EPS-PRIMARY> $.35 $.69 $1.02
<EPS-DILUTED> $.33 $.66 $.97
<FN>
<F1>INCLUDES COST ASSIGNED TO CONTRACTS ACQUIRED, NET, OF $997,072, $1,129,066 AND
$1,146,064 FOR THE THREE, SIX AND NINE MONTHS ENDED MARCH 31, JUNE 30 AND
SEPTEMBER 31, 1997.
<F2>INCLUDES SENIOR NOTES PAYABLE OF $150,000, $150,000 AND $175,000 AND
SUBORDINATED NOTES PAYABLE OF $445,274, $547,922 AND $547,442 FOR THE THREE,
SIX AND NINE MONTHS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 1997.
<F3>REPRESENTS AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 31, JUNE 30 AND
SEPTEMBER 30, 1996, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE,
SIX AND NINE MONTHS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 1996. THIS
INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000796370
<NAME> UNITED ASSET MANAGEMENT CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 108,676 178,525 197,474
<SECURITIES> 0 0 0
<RECEIVABLES> 125,540 135,568 151,794
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 247,343 326,906 360,563
<PP&E> 61,384 69,080 71,332
<DEPRECIATION> 33,539 38,259 40,897
<TOTAL-ASSETS> 1,362,791<F1> 1,420,584<F1> 1,433,149<F1>
<CURRENT-LIABILITIES> 143,984 193,482 210,876
<BONDS> 653,436<F2> 649,232<F2> 641,043<F2>
0 0 0
0 0 0
<COMMON> 616 692 692
<OTHER-SE> 503,297 519,017 524,345
<TOTAL-LIABILITY-AND-EQUITY> 1,362,791 1,420,584 1,433,149
<SALES> 0 0 0
<TOTAL-REVENUES> 208,522 415,187 634,805
<CGS> 0 0 0
<TOTAL-COSTS> 134,431 269,861 415,384
<OTHER-EXPENSES> 28,780<F3> 53,362<F3> 77,654<F3>
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 11,055 21,166 30,754
<INCOME-PRETAX> 34,256 70,798 111,013
<INCOME-TAX> 14,769 30,434 47,644
<INCOME-CONTINUING> 19,487 40,364 63,369
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 19,487 40,364 63,369
<EPS-PRIMARY> $.29 $.59 $.93
<EPS-DILUTED> $.27 $.56 $.88
<FN>
<F1>INCLUDES COST ASSIGNED TO CONTRACTS ACQUIRED, NET, OF $1,026,876, $1,002,412
AND $978,143 FOR THE THREE, SIX AND NINE MONTHS ENDED MARCH 31, JUNE, 30 AND
SEPTEMBER 30, 1996 RESPECTIVELY.
<F2>SENIOR NOTES PAYABLE OF $150,000 AND $150,000 AND SUBORDINATED NOTES
PAYABLE OF $503,436, $499,232 AND $491,043 FOR THE THREE, SIX AND NINE MONTHS
ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 1996, RESPECTIVELY.
<F3>REPRESENTS AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
Cautionary Language Regarding Forward-Looking Statements
Certain statements within this Form 10-K, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in other written or oral communications made by or with the approval of an
authorized executive officer of the Company constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words or phrases "can be," "expects," "may affect," "may depend,"
"believes," "estimate," "project" and similar words and phrases are intended to
identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Some of these risks, uncertainties and other
factors are summarized below. Because of such risks, uncertainties and other
factors, the Company cautions each person receiving such forward-looking
statements not to place undue reliance on any such statements. All such
forward-looking statements are current only as of the date and time they are
made. The Company has no obligation, and will not undertake, to release
publicly any revisions to such forward-looking statements (for example, to
reflect events or circumstances occurring after the date and time such
statements were made, or to reflect events or circumstances that were not
anticipated at the date and time such statements were made).
THE PERFORMANCE OF THE COMPANY AND ITS AFFILIATED FIRMS MAY BE ADVERSELY
AFFECTED BY CHANGES IN ECONOMIC AND MARKET CONDITIONS
The advisory fees earned by the Company's affiliated firms vary widely
depending on client account size, type of service, product or style offered, and
other factors, but are based primarily on the market value of assets under
management and by the performance of the affiliated firm in managing those
assets. Consequently, the Company's performance is directly affected by
conditions in financial and securities markets around the world. These markets
are highly volatile and are directly affected by, among other factors, domestic
and foreign economic conditions and general trends in business and finance.
The performance of securities markets may also have an inverse effect on
the assets under management by the Company's affiliated firms which are part of
U.S. defined benefit plans. The Employee Retirement Income Security Act of 1974
("ERISA") and the Internal Revenue Code of 1986 (the "Code") require employers
to fund their defined benefit plans sufficiently to generate the benefits they
have promised. However, the Code also discourages overfunding of defined
benefit plans by employers by limiting tax deductions for contributions
<PAGE>
to fully funded plans. The Company believes that high investment returns
experienced in the 1980s and thus far in the 1990s have resulted in many defined
benefit retirement plans reaching or exceeding their full funding limits based
on actuarial calculations and that, therefore, many employers may have ceased to
contribute additional cash to the plans.
THE COMPANY COULD BE ADVERSELY AFFECTED BY WRITE-OFFS OF ACQUIRED CLIENT
CONTRACTS AND BY ADVERSE TAX RULINGS CONCERNING AMORTIZATION OF CLIENT CONTRACTS
At December 31, 1997, the Company's total assets were approximately $1.5
billion. Cost assigned to contracts acquired, net of accumulated amortization,
was approximately $1.0 billion (or approximately 67% of total assets). The cost
assigned to contracts acquired is amortized on a straight-line basis over the
estimated weighted average useful life of the contracts of the individual firms
acquired. These lives are estimated through statistical analysis of historical
patterns of terminations and the size and age of the contracts acquired as of
the acquisition date. When actual terminations differ from the statistical
patterns developed, or upon the occurrence of certain other events, the Company
updates the lifing analysis described above. If the update indicates that any
of the estimates should be shortened, the remaining cost assigned to contracts
acquired will be amortized over the shorter life commencing in the year in which
the new estimate is determined.
In addition, the Company regularly performs reviews for potential
impairment of the values of contracts, which may result from various changes in
circumstances including, among others, changes at the respective affiliated
firms in advisory fee schedules, strategic planning, client and consultant
relationships, and management of portfolio assets. Such an evaluation compares
the carrying value of the asset against the estimated undiscounted future cash
flows associated with the asset. If the evaluation indicates that the
undiscounted future cash flows are not sufficient to recover the carrying value
of the asset, the asset is adjusted to its estimated fair value. The press
release filed as Exhibit 99.1 to the Company's Form 8-K filed on January 22,
1998 describes a noncash charge against pre-tax earnings for the fourth quarter
of fiscal year 1997 resulting from the impairment of client contracts at two of
the Company's affiliated firms.
The Company intends to acquire additional investment management firms in
the future. While these firms will contribute additional revenue to the
Company, such investments will also result in the recording of additional
intangible assets. Future impairments requiring the write-off of a significant
portion of unamortized cost assigned to contracts acquired, with respect to
existing affiliated firms or firms that the Company may acquire in the future,
could have a material adverse effect on the Company's financial condition or
results of operations.
Contract amortization for income tax purposes is described in detail in the
Notes to Consolidated Financial Statements which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. As more
<PAGE>
fully described in such Notes, the Company's federal income tax returns for
the years ending December 31, 1984 through December 31, 1992 are under audit
by the Internal Revenue Service. Although the Company believes that the
audit will be resolved without material adverse effect on the Company's
consolidated financial position, its consolidated results of operations or
its consolidated cash flows, if the adjustments proposed in the Revenue
Agent's Report were upheld in their entirety, the Company's additional
liability for federal income tax for the years 1984 through 1992 would
approximate $56,000,000, plus statutory interest thereon.
THE INVESTMENT MANAGEMENT BUSINESS IS HIGHLY COMPETITIVE
The Company's affiliated firms manage both domestic and international
investment portfolios for corporate benefit plans, mutual funds, government and
union benefit plans, individuals, endowments, and foundations. These portfolios
are invested in U.S. equities, U.S. bonds and cash, international securities,
real estate, and stable value assets. With regard to each of these client
bases, and to each of these asset classes, the investment management business is
highly competitive. Each of the Company's affiliated firms competes for clients
with a broad range of investment managers, including public and private
investment advisers, as well as affiliates of securities broker-dealers,
commercial banks, insurance companies and other entities. In addition to
competing directly for clients, competition can also impact the affiliated
firms' fee structures.
The Company believes that the most important factors affecting competition
in the investment management industry are: (a) the abilities and reputations of
investment managers; (b) differences in the investment performance of investment
management firms; (c) the development of new investment strategies; (d) access
to channels of distribution; (e) resources to invest in information
technologies; and (f) client service capabilities. Further, periodic shifts in
the retirement funds market may favor advisers with strength in particular
areas. For example, the Company believes that the growing prominence of defined
contribution plans is requiring advisers to develop different marketing and
client service capabilities, and that this shift has tended to favor mutual fund
complexes that also offer bundled record-keeping, accounting and other services
to plan sponsors and participants. The press release attached as Exhibit 99.1
to the Company's Form 8-K filed on January 22, 1998 describes a shift in the
market for institutionally managed real estate from commingled funds to other
investment vehicles, including real estate investment trusts that offer
liquidity and public pricing.
Barriers to entry are low, and firms are relatively long-lived in the
investment management business. Client assets are mobile as investment
management contracts are typically terminable by clients without the payment of
a penalty upon 60-days' notice, in the case of contracts with mutual fund
clients, and, typically upon 30-days' notice, in the case of institutional
contracts. Many of the affiliated firms' competitors have greater capital and
other resources than any of the affiliated firms, and than the Company and its
affiliated firms on a consolidated basis. Also, some competitors of the
<PAGE>
affiliated firms have more widely recognized trade names which may offer a
further competitive advantage in the retail market.
THE COMPANY'S AFFILIATED FIRMS RELY ON KEY MANAGEMENT PERSONNEL WHOSE CONTINUED
SERVICE IS NOT GUARANTEED
The Company believes that the business of many of its affiliated firms is
largely dependent on the efforts of key management personnel. Individual
investment managers at the affiliated firms often have regular direct contact
with particular clients, which can lead to a strong client relationship based on
the client's trust in that individual manager. The loss of a key investment
manager of an affiliated firm could jeopardize the firm's relationships with its
clients and lead to the loss of client accounts at the firm. Further, an
inability to attract, retain and motivate sufficient numbers of successor
qualified management personnel for any of the affiliated firms would also
adversely affect the Company's business.
In most cases key management personnel have entered into long-term
employment agreements, pursuant to which they have agreed to devote
substantially all of their working time to the business and affairs of the
respective affiliated firm, and agreed not to provide investment advisory
services to any client of the respective affiliated firm for a period following
the termination of their employment. Also, the Company has used a combination
of economic incentives and vesting provisions as a means of seeking to retain
these individuals. The Company is dependent on the enforceability of these
employment and non-competition agreements. Further, these methods can serve as
no guarantee that these individuals will remain with the Company for the
specified term of the agreements, or for any further term thereafter. The
market for investment managers is extremely competitive and is increasingly
characterized by frequent movement by investment managers among different firms.
Also, as described above, the barriers to entry for new firms in the investment
management industry are low.
THE COMPANY'S ABILITY TO ALTER OR COORDINATE THE MANAGEMENT PRACTICES AND
POLICIES OF ITS AFFILIATED FIRMS IS LIMITED
The principals of the affiliated firms are authorized to manage their
own day-to-day operations, including matters relating to certain employees,
investment management policies and fee structures, product development,
marketing, client relationships, compensation programs and compliance
activities. The Company does retain the authority to elect and remove the
directors of its affiliated firms, and to prevent directly any significant
actions by its affiliated firms. Also, in recent years, the Company has
established a number of organizations that augment the marketing and client
service capabilities of the affiliated firms. However, the Company itself is
not registered as an investment adviser either with the Securities and
Exchange Commission or with any state or foreign regulatory agency, and
therefore cannot render investment advisory services except through its
affiliated firms which are properly registered. Accordingly, the Company's
ability to alter the management practices and policies of its affiliated
firms, and to coordinate marketing and client service efforts, is limited.
<PAGE>
THE COMPANY'S GROWTH STRATEGY AND INVESTMENTS MAY NOT BE SUCCESSFUL
A significant component of the Company's growth strategy is to continue
acquiring ownership interests in investment management firms. To date, the
Company has invested in over 50 such firms and intends to continue this
investment program in the future, subject to its ability to locate suitable
investment management firms in which to invest, its ability to negotiate
agreements with such firms on acceptable terms, and its ability to finance such
acquisitions through the incurrence of additional long-term or short-term
indebtedness or the issuance of additional equity securities in private or
public transactions. As the aggregate amount of assets under management by the
Company's affiliated firms rises, it may require larger acquisitions or more
frequent acquisitions to have a material effect on the financial condition and
results of operations comparable to the effects achieved in the past through the
Company's acquisitions program. Also, each acquisition the Company completes
may require additional managerial resources at the Company level.
The market for partial or total acquisitions of interests in investment
management firms is highly competitive. The Company is aware of several other
holding companies which have been organized to invest in or acquire investment
management firms. 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. In addition to competing directly
for acquisitions, competition can also increase the prices that must be paid to
successfully acquire firms, and therefore decrease the expected returns on such
investments.
As described above, in recent years, the Company has established a number
of organizations that augment the marketing and client service capabilities of
its affiliated firms. As another significant component of its growth strategy,
the Company expects that it will increase its financial support for these
organizations. However, there can be no guarantee that these organizations will
be successful in attracting new assets for management by the Company's
affiliated firms.
THE COMPANY AND ITS AFFILIATED FIRMS MUST BECOME YEAR 2000 COMPLIANT
In 1997, the Company started a program to ensure that all of its
information technology hardware and software are fully compliant with Year 2000
computer-related issues, and to assist each of its affiliated firms in ensuring
that all of their respective information technology hardware and software are
<PAGE>
similarly compliant. As a part of this program, the Company has and will
continue to make certain investments in its software systems and
applications. The financial impact to the Company has not been and is not
anticipated to be material. However, there can be no guarantee that this
program will be completely successful in ensuring full and timely compliance
with Year 2000 computer-related issues, and a failure by the Company and its
affiliated firms to achieve full and timely compliance could have a material
adverse effect on the Company's financial condition and results of operations.
