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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1999 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
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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)
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
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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 and non-voting common equity held
by non-affiliates of the registrant was approximately $886 million based on the
last reported sale price of the registrant's common stock on the New York Stock
Exchange composite tape on March 15, 2000.
The number of shares of Common Stock ($.01 par value) outstanding as of
March 15, 2000 was 56,366,106.
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, 1999,
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 18, 2000. Such Report and Proxy Statement, except for the
parts therein that 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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<PAGE>
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, government and union benefit
plans, mutual funds, 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"). 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, 1999, no single client of any Affiliated
Firm provided more than 4% 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
distribution and client service organizations which are available to the
Affiliated Firms to supplement the investment management services they provide.
UAM has also developed an operating partnership concept with the Affiliated
Firms. These are 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: (1) changes in
the market value of securities; (2) net cash flow into or out of existing
accounts; (3) gains of new or losses of existing accounts by specific firms or
segments of the industry; and (4) 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 2000 Directory, $6.4 trillion in assets under management in
accounts of employee benefit plans and endowments within the United States as of
mid-1999, which represents an average compound five-year annual growth rate of
13.5% since mid-1994. The 1999 Directory also reported $15.0 trillion of assets
under management as of mid-1999 at investment advisory firms (including branch
offices) within the United States, which represents an average compound
five-year annual growth rate of 22.3% over the corresponding assets since
mid-1994.
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 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.
Competition
The Affiliated Firms compete to manage domestic and international
investment portfolios for corporate, government and union benefit plans, mutual
funds, individuals, endowments, and foundations. Management believes that the
most important factors affecting competition in the investment management
industry are: (1) the abilities and reputations of investment managers; (2)
stability of a firm's workforce, especially of portfolio managers; (3) an
effective marketing force with broad access to channels of distribution; (4)
differences in the investment performance of
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investment management firms; (5) adherence to particular investment styles; (6)
quality of client service; (7) the development of new investment strategies; (8)
resources to invest in information technologies; and (9) public recognition of
trade names in retail markets.
The Affiliated Firms face many competitors, including public and private
investment advisers, as well as affiliates of securities broker-dealers,
commercial banks, investment banks, and insurance companies. Barriers to entry
are low, and firms in the investment management business are relatively
long-lived.
Institutional clients typically may terminate investment management
contracts without penalty upon 30-days' notice. Mutual funds typically may
terminate investment management contracts without penalty upon 60-days' notice,
and retail clients may redeem investments in mutual funds at any time.
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 that 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. As part of its "operating
partnership" with its Affiliated Firms, UAM is providing significantly more
financial and management assistance to its Firms in product development, client
service, marketing operations, technology and other areas. During 1999, the
Company committed more than $20 million to these programs in 18 of its firms.
In addition, UAM assists Firms in planning for future growth and
management development, particularly with respect to succession planning. The
Company sponsors seminars and meetings for executives from each of the
Affiliated Firms and from UAM that serve as forums for sharing business
information. UAM is also offering more enterprise-wide services to its Firms
such as investment-performance attribution analysis supplied by a leading
provider of analytical services to the investment management industry.
During 1999, the Company continued to enhance its website, www.uam.com, to
make it a direct, convenient link between UAM's investment professionals and
sophisticated investors. The Company also implemented full transaction
capability on its website for shareholders of UAM Funds.
In recent years, UAM has established a number of organizations that
augment the marketing and client service capabilities of its Affiliated Firms.
UAM (Japan) Inc. offers the diverse investment management services of the
Affiliated Firms to the Japanese institutional market. UAM (Japan) has a license
to offer fully discretionary investment management services to Japanese
institutional investors.
UAM Investment Services, Inc. provides UAM affiliates third-party
marketing, sales and product development in the U.S. and certain European
countries. ISI offers mutual funds, trust portfolios, and individual account
products. These products are offered principally to professional financial
advisors and individuals, banks, and providers of 401(k) services.
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UAM Funds, Inc. and UAM Funds, Inc. II, each a series mutual fund, allow
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, 1999, 25 of the Affiliated Firms managed 49 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.
UAM Shareholder Service Center, Inc. provides fund shareholders with
product and account information, transaction processing, and transfer agent
services. The center enables Pilgrim Baxter and other UAM Affiliated Firms to
consolidate and enhance shareholder services and marketing activities.
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. Many 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.
See Note 7 of the Company's 1999 Annual Report to stockholders (the Annual
Report), which is incorporated herein by reference, for the Company's segment
information.
Revenue Sharing
Most of UAM's Affiliated Firms operate 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 pays for all of its business expenses out of its share of
revenues. Each year, the
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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. UAM is also modifying its economic
relationship with some of its affiliates to enable the principals to hold equity
in their own firms.
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.
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 $8.9 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. Another Affiliated Firm, with $13.8 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: (1) tend to insulate UAM from
the various cycles of market performance for specific asset classes and
individual Firms; (2) permit more than one Affiliated Firm to serve any single
client; and (3) 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, government and union benefit plans, mutual funds, individuals,
endowments, and foundations. As
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of December 31, 1999, UAM's Firms had approximately $202.6 billion under
management with an average account size of $32.7 million. The 20 largest clients
of UAM's Affiliated Firms represented 15% of total revenues and the 100 largest
clients represented 29%. Additional information regarding the number of clients
and types and amounts of assets under management is found in the table on page
25 of the Annual Report, which is incorporated herein by reference.
The following table summarizes UAM's asset mix:
<TABLE>
<CAPTION>
Assets Under Management at December 31,
(in millions) 1997 1998 1999
---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Equities $123,213 63% $127,871 63% $127,869 63%
International Securities 27,947 14 28,161 14 28,574 14
U.S. Bonds and Cash 27,164 14 25,999 13 23,561 12
Stable Value 8,650 4 10,060 5 13,820 7
Real Estate 10,515 5 9,302 5 8,794 4
-------- --- -------- --- -------- ---
$197,489 100% $201,393 100% $202,618 100%
======== === ======== === ======== ===
</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 to discuss investment philosophy, management fees
and a variety of other related matters.
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, while
adding value to the Firm through an operating partnership described below. 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. After acquisition by UAM, Affiliated Firms continue
to operate under their own firm name, with their own leadership and individual
investment philosophy and approach.
In selecting acquisition candidates, the Company uses selective criteria
for potential transactions. The Company focuses on investment management firms
that will enhance the business of existing affiliates, provide entry to new
channels of distribution, or boost UAM's participation in attractive asset
classes that are currently under-represented among its Firms. UAM is interested
in companies that have pursued their investment philosophy with consistency,
shown a determination and an ability to grow, and developed a second generation
of money managers and leaders. 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: (1) the high value of the firm relative to its
principals' total net worth; (2) the need
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for liquidity on the part of the principals; (3) their desire for
diversification and a reduction in their exposure to a single firm's results;
(4) their autonomy after acquisition; and (5) 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 noncompete 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,
and/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."
To fund acquisitions, the Company utilizes its existing capital, together
with internally generated cash and borrowings available under its $750,000,000
Reducing Revolving Credit Agreement (as more fully described in Note 3 of the
Annual Report, also see Items 8 and 14 of this Form 10-K). Such borrowings are
secured by the stock of the Company's subsidiaries.
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. Four 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, 1999 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>
Chicago Asset Management Company Chicago, IL October 1983
Colony Capital Management, Inc. 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 Investors, 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
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
L&B Realty Advisors, Inc. Dallas, TX June 1992
NWQ Investment Management Company Los Angeles, CA October 1992
Tom Johnson Investment Management, Inc. Oklahoma City, OK December 1992
Pell, Rudman & Co., Inc. Boston, MA March 1993
Heitman Financial LLC 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 Rancho Santa Fe, CA February 1994
Suffolk Capital Management, Inc. New York, NY July 1994
UAM (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
Integra Capital Management Corporation Toronto, Ontario January 1998
</TABLE>
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Employees
The UAM holding company has 76 employees, 9 of whom are executive officers
of UAM (see Item 10, Directors and Executive Officers of the Registrant). 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 5 and 7, respectively). At December 31, 1999, the Company, as a whole,
employed 2,189 persons. These numbers exclude 178 individuals who are employed
by the property management subsidiary of L&B Realty Advisors, Inc. and whose
total compensation is billed directly to clients of this affiliate.
Available Information
Information about the Company, including copies of its Forms 10-K and 10-Q
filed with the Securities and Exchange Commission, may be obtained without
charge by writing to the Company at One International Place, Boston,
Massachusetts 02110 or reviewing its website at www.uam.com. This information
may also be obtained by contacting the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 (1-800-SEC-0330).
Item 2. Properties
UAM's executive offices in Boston, Massachusetts occupy approximately
27,000 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 1999, UAM issued an aggregate of 494,624
shares of its Common Stock, $.01 par value, in reliance on 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 $17.50 to $22.66 per share.
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As of March 15, 1999, there were 348 stockholders of record. The balance
of the information required by this item is incorporated herein by reference to
the "Common Stock Information" on page 47 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 30 and 31 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 26 through 29 of the
Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposures are in the areas of
interest-rate risk, foreign currency exchange-rate risk, and equity-price risk.
The Company's exposure to interest-rate risk arises from variable-rate and
fixed-rate debt arrangements entered into for other-than-trading purposes. To
mitigate the risks associated with increases in interest rates, the Company has
entered into and plans to continue to enter into interest-rate protection
agreements. The agreement outstanding as of December 31, 1999 extends up to two
years and limits interest rates to an average of 8.4%. Tabular information with
respect to this interest-rate protection agreement has not been presented as the
financial statement impact of such agreement is not considered material.
The table below summarizes the Company's market risks associated with debt
obligations as of December 31, 1999. At Decemer 31, 1999, the Company had
borrowings outstanding of $297,000,000 outstanding under its $750,000,000
Reducing Revolving Credit Agreement (the Credit Agreement). Interest rates
available for amounts outstanding under the Credit Agreement are currently:
prime, 1.875% over 30-day LIBOR or a money market bid option. The recorded cost
of the Senior Notes and Credit Agreement approximates fair value. Due to the
unique nature of each of the subordinated debt instruments issued as
consideration for businesses acquired, an assessment of current fair value is
not practical. In the table, effective interest rates shown for subordinated
debt instruments represent a weighted-average of fixed interest rates attached
to notes having a particular expected year of maturity. The Company intends to
finance the Senior Notes, as well as the subordinated debt that becomes due
which has not been tendered in connection with the exercise of warrants, by
utilizing the Credit Agreement. As such, $25,000,000 of Senior Notes and
$3,349,000 of subordinated notes due in 2000 have been included in the payments
due in 2003, the year the Credit Agreement expires.
10
<PAGE>
<TABLE>
<CAPTION>
Expected Year of Maturity
---------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Subordinated Debt - $88,747,000 $51,187,000 $1,413,000 $33,250,000 $3,791,000
Effective interest rate - 6.28% 6.47% 6.50% 6.09% 6.50%
Fixed-Rate Senior Notes - $25,154,000 $25,000,000 $25,000,000 $25,000,000 $25,000,000
Effective interest rate - 8.92% 8.92% 8.92% 8.92% 8.92%
Fixed-Rate Senior Notes - - $10,714,000 $10,714,000 $10,714,000 $217,858,000
Effective interest rate - - 8.52% 8.52% 8.52% 8.62%
Variable-Rate Senior Debt - - - $328,596,000 - -
Effective interest rate - - - 8.44% - -
</TABLE>
The Company also has exposure to foreign currency exchange-rate fluctuations for
the cash flows received from its foreign affiliates. This risk is mitigated by
the fact that the operations of its subsidiaries, most of which are located in
the U.K. or Canada, are conducted in their respective local currencies. In
addition, any cash remitted by the foreign affiliates occurs shortly after the
related accounts receivable have been collected, further mitigating this risk.
Currently, the Company does not engage in foreign currency hedging activities as
it does not believe that its foreign currency exchange rate risk is material.
The Company also has equity-price risk as more fully described in the "Industry"
section on page two. This risk is somewhat mitigated by the Company's practice
of participating in revenue sharing with its Affiliates. See page 4 for a
discussion of "Revenue Sharing." The Company does not use any
market-rate-sensitive instruments for trading purposes or otherwise to protect
against this risk.
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 47 of the Annual Report,
"Consolidated Financial Statements" and "Notes to the Consolidated Financial
Statements" on pages 32 through 45 of the Annual Report, and the "Report of
Independent Accountants" on page 46 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," "Executive Officers," and
"Proxy Statement - Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 18, 2000 (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 - Total Option Exercises in 1999 and Year-End Values,"
"Executive Compensation - Option Grants in 1999," "Executive Compensation -
Compensation Committee Report," "Performance Graph," "Compensation Committee
Interlocks and Insider Participation," and "Governance of the Company -
Compensation of Directors" 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 "Ownership of UAM's Common Stock" 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 "Governance of the Company - Related Transactions" 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 32 through 46 of the Annual Report, are incorporated herein by
reference as a part of this Form 10-K:
Page(s) in the
Title Annual Report
----- -------------
Report of Independent Accountants. 46
Consolidated Balance Sheet as of December 31, 1999
and 1998. 32
Consolidated Statement of Operations for each of the
three years in the period ended December 31, 1999. 33
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 1999. 34
Consolidated Statement of Changes in Stockholders'
Equity for each of the three years in the period ended
December 31, 1999. 35
Notes to Consolidated Financial Statements. 36 - 45
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 F-1
Statement Schedule.
Schedule VIII Valuation and Qualifying Accounts F-2
for each of the three years in the
period ended December 31, 1999.
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
Exhibit
Number Title
------ -----
(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.
(5) 10.1 $750,000,000 Amended and Restated Credit Agreement
dated as of April 29, 1998.
(5) 10.2 Undertaking to Furnish Copies of Omitted Exhibits
and Schedules to $750,000,000 Amended and Restated
Credit Agreement dated as of April 29, 1998.
(6) 10.3 Amendment No. 1 to Amended and Restated Credit
Agreement dated as of August 12, 1998.
(2) 10.4 Amendment No. 2 and Waiver to Amended and Restated
Credit Agreement dated as of December 30, 1998.
(2) 10.5 Amendment No. 3 and Waiver to Amended and Restated
Credit Agreement dated as of January 29, 1999.
(7) 10.6 Note Purchase Agreement dated as of August 1, 1995.
13
<PAGE>
(8) 10.7 First Amendment dated as of June 23, 1998 to Note
Purchase Agreement dated as of August 1, 1995.
(6) 10.8 $250,000,000 Note Purchase Agreement dated as of
August 12, 1998.
(6) 10.9 Undertaking to Furnish Copies of Omitted Exhibits
and Schedules to $250,000,000 Note Purchase
Agreement dated as of August 12, 1998.
(9) 10.10 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.
(10) 10.11 Revised First Amendment to United Asset Management
Corporation Profit Sharing and 401(k) Plan
effective as of January 1, 1992.
(10) 10.12 Second Amendment to United Asset Management
Corporation Profit Sharing and 401(k) Plan
effective as of January 1, 1993.
(1) 10.13 Third Amendment to United Asset Management
Corporation Profit Sharing and 401(k) Plan
effective as of January 1, 1994.
(11) 10.14 Fourth Amendment to United Asset Management
Corporation Profit Sharing and 401(k) Plan
effective as of January 1, 1995.
10.15 Fifth Amendment to United Asset Management
Corporation Profit Sharing and 401(k) Plan
effective as of January 1, 2000.
(12) 10.16 United Asset Management Corporation Amended and
Restated 1994 Stock Option Plan (as further amended
and restated as of March 31, 1999).
(2) 10.17 United Asset Management Corporation Stock Option
Deferral Plan effective December 29, 1998.
(11) 10.18 United Asset Management Corporation Deferred
Compensation Plan effective January 1, 1994.
(13) 10.19 First Amendment to United Asset Management
Corporation Deferred Compensation Plan effective
July 1, 1997.
10.20 Second Amended and Restated Consulting Agreement by
and between United Asset Management Corporation and
David I. Russell as of January 1, 2000.
(5) 10.21 Employment Agreement between United Asset
Management Corporation and Charles E. Haldeman, Jr.
dated March 1, 1998.
10.22 First Amendment dated November 29, 1999 to
Employment Agreement between United Asset
Management Corporation and Charles E. Haldeman, Jr.
14
<PAGE>
10.23 Salary Continuation Plan
(14) 10.24 Forms of Agreements with Certain Employees.
11.1 Calculation of Earnings (Loss) Per Share.
12.0 Not applicable.
13.1 Annual Report to Stockholders for the Year Ended
December 31, 1999.
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.
27.1 Financial Data Schedules.
99.1 Risk Factors.
Notes to Exhibit Listing
(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 Annual Report on Form 10-K for
the year ended December 31, 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 March 31, 1998, and incorporated herein by
reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998, and incorporated herein by
reference.
(7) 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.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, and incorporated herein by
reference.
15
<PAGE>
(9) 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.
(10) 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.
(11) 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.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, and incorporated herein by
reference.
(13) 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.
(14) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999, and incorporated herein by
reference.
Location of Documents Pertaining to Executive Compensation Plans and
Arrangements:
(1) United Asset Management Corporation Amended and Restated 1994 Stock
Option Plan (as further amended and restated as of March 31, 1999),
Exhibit 10.16 to this form 10-K.
(2) United Asset Management Corporation Stock Option Deferral Plan
effective December 29, 1998, Exhibit 10.17 to this Form 10-K.
(3) United Asset Management Corporation Deferred Compensation Plan
effective January 1, 1994, Exhibit 10.18 to this Form 10-K.
(4) First Amendment to United Asset Management Corporation Deferred
Compensation Plan effective July 1, 1997, Exhibit 10.19 to this Form
10-K.
(5) Second Amended and Restated Consulting Agreement by and between
United Asset Management Corporation and David I. Russell as of
January 1, 2000, Exhibit 10.21 to this form 10-K.
(6) Employment Agreement between United Asset Management Corporation and
Charles E. Haldeman, Jr. dated March 1, 1998, Exhibit 10.22 to this
Form 10-K.
(7) Amendment dated November 29, 1999 to Employment Agreement between
United Asset Management Corporation and Charles E. Haldeman, Jr.,
Exhibit 10.23 to this Form 10-K.
(8) Salary Continuation Plan, Exhibit 10.24 to this Form 10-K.
(9) Forms of Agreement with Certain Employees, Exhibit 10.25 to this
form 10-K.
16
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 29, 1999. The items reported
and financial statements and exhibits were as follows:
Item 5. Other Events
On November 29, 1999, the Company published a press release in the
form of Exhibit 99.1.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99.1 Press Release of United Asset Management Corporation
Dated November 29, 1999.
17
<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, 2000 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
- ---------------------------------
(Norton H. Reamer) Director March 17, 2000
/s/ Harold J. Baxter
- ---------------------------------
(Harold J. Baxter) Director March 17, 2000
/s/ Francis Finlay
- ---------------------------------
(Francis Finlay) Director March 17, 2000
/s/ Robert J. Greenebaum
- ---------------------------------
(Robert J. Greenebaum) Director March 17, 2000
/s/ Beverly L. Hamilton
- ---------------------------------
(Beverly L. Hamilton) Director March 17, 2000
/s/ George E. Handtmann, III
- ---------------------------------
(George E. Handtmann, III) Director March 17, 2000
/s/ Jay O. Light
- ---------------------------------
(Jay O. Light) Director March 17, 2000
/s/ David I. Russell
- ---------------------------------
(David I. Russell) Director March 17, 2000
/s/ Philip Scaturro
- ---------------------------------
(Philip Scaturro) Director March 17, 2000
/s/ John A. Shane
- ---------------------------------
(John A. Shane) Director March 17, 2000
/s/ Barbara S. Thomas
- ---------------------------------
(Barbara S. Thomas) Director March 17, 2000
18
<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 2, 2000 appearing in the 1999 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)(2) 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/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 2000
F-1
<PAGE>
Schedule VIII
UNITED ASSET MANAGEMENT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Cost Assigned
to Contracts Acquired
-----------------------------------------------
Weighted
Range of Average
Estimated Estimated
Remaining Remaining
Lives Lives Beginning Additions Ending
Firm (in years) (in years) Balance and Other Balance
- ---- ---------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
1997
- ----
PBA 3-15 13 $ 117,133 $ - $ 117,133
PFR 15 15 - 128,391 128,391
PIC 1-21 15 347,140 69,021 416,161
All Others 1-17 6 963,184 (98,610) 864,574
-------------- ------------ --------------
$1,427,457 $ 98,802 $1,526,259
============== ============ ==============
1998
- ----
PBA 2-14 12 $ 117,133 $ - $ 117,133
PFR 14 14 128,391 34 128,425
PIC 1-20 14 416,161 (1,828) 414,333
All Others 1-16 6 864,574 5,971 870,545
-------------- ------------ --------------
$1,526,259 $ 4,177 $1,530,436
============== ============ ==============
1999
- ----
PBA 1-13 11 $ 117,133 $ - $ 117,133
PFR 13 13 128,425 (50) 128,375
PIC 1-19 13 414,333 - 414,333
All Others 1-15 5 870,545 11,478 882,023
-------------- ------------ --------------
$1,530,436 $ 11,428 $1,541,864
============== ============ ==============
<CAPTION>
Accumulated Amortization
------------------------------------------------------------
Ending
Tax
Charged to Balance
Beginning Operations Ending In Excess
Firm Balance and Other Balance of Book
- ---- --------- ---------- ------- ---------
<S> <C> <C> <C> <C>
1997
- ----
PBA $ 10,894 $ 7,375 $ 18,269 $ 510
PFR - 4,725 4,725 979
PIC 35,900 19,596 55,496 12,885
All Others 420,777 8,820 429,597 (53,137)
------------ ------------ ------------ -----------
$467,571 $ 40,516 $ 508,087 $ (38,763)
============ ============ ============ ===========
1998
- ----
PBA $ 18,269 $ 7,351 $ 25,620 $ 409
PFR 4,725 8,018 12,743 1,517
PIC 55,496 23,807 79,303 16,707
All Others 429,597 51,358 480,955 (60,044)
------------ ------------ ------------ -----------
$508,087 $ 90,534 $ 598,621 $ (41,411)
============ ============ ============ ===========
1999
- ----
PBA $ 25,620 $ 7,361 $ 32,981 $ 800
PFR 12,743 8,020 20,763 2,052
PIC 79,303 24,459 103,762 20,770
All Others 480,955 61,949 542,904 (63,548)
------------ ------------ ------------ -----------
$598,621 $ 101,789 $ 700,410 $ (39,926)
============ ============ ============ ===========
</TABLE>
F-2
UNITED ASSET MANAGEMENT CORPORATION
PROFIT SHARING AND 401(k) PLAN
FIFTH AMENDMENT
WHEREAS, United Asset Management Corporation (hereinafter referred to as
the "Company") adopted the United Asset Management Corporation Profit Sharing
and 401(k) Plan (hereinafter referred to as the "Plan") effective as of January
1, 1989 and restated effective January 1, 1990, to provide retirement benefits
for certain employees of the Company and its subsidiaries; and
WHEREAS, in accordance with Article 11, the Company wishes to amend the
Plan;
NOW, THEREFORE, the Plan is hereby amended effective as of January 1, 2000,
unless otherwise indicated, as follows:
1. Section 1.18 is amended to read and provide as follows:
"Employee" means any person employed by the Company or an Affiliated
Company, excluding, however, (i) any such person who is a member of a unit
of Employees covered by a collective bargaining agreement, unless such
agreement provides for the application of the Plan to the Employees in such
unit; (ii) any such person who is a non-resident alien; (iii) any such
person who executes a waiver of participation in the Plan or an agreement
not be classified as an Employee (provided that any such waiver or
agreement shall conform to the requirements of Treasury Regulations Section
1.401(k)-1(a)(3)(iv), as amended, or any applicable successor rules); and
(iv) any person who is determined or agrees not to be a common-law employee
of the Company or any Affiliated Company or who is classified as a
non-employee by the Company or Affiliated Company using such person's
services, regardless of whether such determination or classification was
erroneous and regardless of the person's actual employment status. (Such
determination, agreement or classification shall be in writing but may be
in any form elected by the Company or an Affiliated Company, such as,
without limitation, an employment record, memorandum or letter.) Without
limiting the generality of the foregoing, the term Employee shall exclude
all persons who are classified as independent contractors, consultants,
contract workers or the like. If a person is not an Employee because of an
erroneous determination or classification as to the person's employment
status, or if a person's agreed-upon status changes, or if a person who was
classified as a non-Employee is reclassified as an Employee, such person
shall not be entitled to participate in the Plan retroactively or to
receive any retroactive benefits or other compensation on account of any
period prior to the date of the reclassification, corrected determination,
or change in agreed-upon status, but each such person shall be credited
with Hours of
<PAGE>
Service under the Plan for all service as a common-law employee of the
Company or any Affiliated Company to the extent required by applicable law.
Notwithstanding anything to the contrary in this Plan, any person who is a
leased employee (as defined in Section 414(n)(2) of the Code, without
regard to Section 414(n)(5) of the Code) of the Company or an Affiliated
Company shall be treated as an Employee under this Plan solely for the
purpose of crediting such person with Hours of Service towards eligibility
and vesting under the Plan if and when such person ceases to be a leased
employee and becomes an Employee within the meaning of the definition above
in this section. Such persons shall also be counted to the extent required
by Section 410(b) of the Code in determining whether the Plan meets the
coverage requirements imposed by such section, but such persons shall not
otherwise be eligible for participation in this Plan except as specifically
provided for in the Plan.
2. Section 1.40 is amended to read and provide as follows:
"Valuation Date" means the last day of each calendar month or any other
date as determined by the Committee. In the event that the Committee
authorizes daily valuation, the Valuation Date shall be the close of
business on each day that the New York Stock Exchange is open and
conducting business.
3. The first sentence of the first paragraph of Section 3.1 is amended to read
and provide as follows:
Each Participant may elect to have contributions made to the Plan on the
Participant's behalf as provided below.
4. The second and fourth sentences of the first paragraph of Section 3.1 are
deleted in their entirety.
5. The second paragraph of Section 3.1 is amended to read and provide as
follows:
Contributions made pursuant to this Section 3.1 shall be remitted to the
Trustee or a custodian appointed by the Committee as soon as is
administratively practicable but in any event within any time limit that
may be prescribed from time to time by applicable regulations.
6. Section 3.1(a) is amended to read and provide as follows:
Before-Tax Contributions - Subject to any uniform limit as may be set from
time to time by the Committee and in whatever manner as may be prescribed
from time to time by the Committee, a Participant may elect to have the
Company contribute an amount of such Participant's Compensation under a
Salary Deferral Agreement.
7. The first sentence of the first paragraph of Section 3.2 is amended to read
and provide as follows:
A Participant may elect to change the Participant's rate of After-Tax
Contributions under the Participant's payroll deduction authorization as of
the first day of any payroll period,
2
<PAGE>
provided that the Participant (i) executes a new payroll deduction
authorization at least thirty (30) days in advance or (ii) if authorized by
the Committee, communicates such election by telephone or electronic means
directly to the Company at least thirty (30) days in advance and executes a
new payroll deduction authorization before the first day of the payroll
period during which the election becomes effective.
8. The first sentence of the second paragraph of Section 3.2 is amended to
read and provide as follows:
A Participant may elect to change the Participant's rate of Before-Tax
Contributions under the Participant's Salary Deferral Agreement as of the
first day of any payroll period, provided that the Participant (i) executes
a new Salary Deferral Agreement at least thirty (30) days in advance or
(ii) if authorized by the Committee, communicates such election by
telephone or electronic means directly to the Company at least thirty (30)
days in advance and executes a new Salary Deferral Agreement before the
first day of the payroll period during which the election becomes
effective.
9. Section 3.4 is amended by adding a new Section 3.4(f) as follows:
Notwithstanding anything to the contrary, a note may not be transferred to
the Trust Fund pursuant to this Section 3.4.
10. The third paragraph of Section 4.1 is amended to read and provide as
follows:
The Company Contribution (if any) made by any Company on account of a Plan
Year shall be (a) allocated among each Participant who (i) is eligible
during such Plan Year under the provisions of Section 2.2, (ii) is an
active Employee on the last day of such Plan Year; and (iii) received any
portion of his or her Compensation for such Plan Year from such Company and
(b) allocated in the proportion that the amount of each Participant's
Compensation paid for such Plan Year by such Company bears to the total
Compensation paid to all eligible Participants for such Plan Year by such
Company, subject to the limitations specified in this Article IV.
11. The first sentence of Section 5.3 is amended to read and provide as
follows:
The Participant may, as of any Valuation Date subsequent to such
Participant's initial participation in the Plan and upon notice at least
thirty (30) days prior to such Valuation Date, elect to have such
Participant's future contributions invested in a proportion different from
that previously selected. Notice pursuant to this Section 5.3 shall be in
writing or, if authorized by the Committee, through communication by
telephone or electronic means directly from the Participant to the Company.
12. The first sentence of Section 5.7 is amended to read and provide as
follows:
Upon notice to the Committee in writing or, if authorized by the Committee,
through communication by telephone or electronic means directly from the
Participant to the Committee, each Participant may elect that any portion
of the Participant's interest (in increments of 1%) in any fund (except the
Loan Fund) be transferred to any other fund
3
<PAGE>
(except the Loan Fund). Such election shall become effective as soon as is
administratively practicable.
13. The first sentence of the second paragraph of Section 5.8(a) is amended to
read and provide as follows:
Valuations of such accounts shall be made at such times as the Committee
may require, but no less frequently than monthly.
14. The first sentence of Section 6.4 is amended to read and provide as
follows:
In the event a Participant is reemployed prior to incurring five
consecutive Breaks in Service, any non-vested amount of such Participant's
Company Account which was forfeited shall be restored to such Participant's
Company Account on the Valuation Date coincident with or next succeeding
the later of the Participant's reemployment date or the date that the
Participant repays the full amount of any prior distribution, not including
any interest thereon, to the Plan.
15. Section 7.3(a) is amended to read and provide as follows:
(a) in installments as soon as practicable after the last day of each
calendar month, commencing with the calendar month that includes the
applicable Valuation Date determined under Section 7.2, over a period
of not more than fifteen (15) years, the amounts of which are
calculated by dividing (i) the then current value of the Participant's
Total Account as of the final Valuation Date in each month for which
an installment is due by (ii) the remaining number of unpaid
installments, including the installment then being calculated; or
16. The last paragraph of Section 7.3(b) is deleted in its entirety.
17. Section 7.5(i) is amended to read and provide as follows:
No benefit account of $5,000 or less shall be eligible for deferral of a
lump-sum payment or for installment payments.
18. Section 7.8(b) is amended to read and provide as follows:
in the event the Participant's vested interest in the Trust Fund is $5,000
or less, his vested interest shall be distributed in a lump sum
distribution as soon as practicable after the first Valuation Date that
follows his date of termination by at least ten (10) days in the amount
determined as of such Valuation Date.
19. The first sentence of Section 7.8(c) is amended to read and provide as
follows:
in the event the Participant's vested interest in the Trust Fund exceeds
$5,000, a lump sum distribution of such vested interest shall be deferred
unless the Participant elects distribution at an earlier date.
4
<PAGE>
20. The first sentence of the last paragraph of Section 8.1 is amended to read
and provide as follows:
The withdrawal shall be made as soon as is administratively practicable but
in any event no later than thirty (30) days after the date on which the
request for the withdrawal is received.
21. The third paragraph of Section 8.5 is amended to read and provide as
follows:
The loan shall be made as soon as is administratively practicable but in
any event no later than thirty (30) days after the date on which is the
loan application is received.
22. Section 8.6(e) is amended to read and provide as follows:
Repayment shall be made by payroll deduction of substantially equal amounts
in each of the borrower's payroll periods, commencing no later than 3
months following the date that the loan or any portion of the loan is
disbursed; provided that a borrower who commences an unpaid leave of
absence shall continue making repayments by check on such schedule as the
Committee shall approve (such approval to be made in a uniform and
non-discriminatory manner); provided further that such payments by check
shall be scheduled in substantially equal installments not less frequently
than quarterly. Each loan shall be scheduled for repayment over a period of
not more than (i) 5 years from the date that the loan or any portion of the
loan is disbursed; or (ii) 30 years from the date the loan or any portion
of the loan is disbursed if such loan is used to acquire any dwelling unit
which within a reasonable period of time is to be used (determined at the
time the loan is made) as the principal residence of the Participant.
23. Section 8.6(f) is deleted in its entirety.
24. Section 8.6(l) is deleted in its entirety.
25. Sections 8.6(g), (h), (i), (j), (k), (m), (n) and (o) are redesignated
Sections 8.6(f), (g), (h), (i), (j), (k), (l), and (m), respectively.
26. Redesignated Section 8.6(f) is further amended to read and provide as
follows:
Full or partial repayment of the outstanding balance may be made by check
as of any Valuation Date after the Valuation Date on which the loan was
made.
27. Redesignated Section 8.6(g) is further amended to read and provide as
follows:
The amount of each repayment, including principal and interest, shall be
credited to each fund in accordance with the Participant's then current
investment election.
28. Article 9 is amended by adding the following new Section 9.9:
9.9 Obligation to Pay Expenses
5
<PAGE>
Expenses incurred in administering the Plan, including those necessary
for the administration of the Trust Fund, shall be paid out of the
principal or income of the Trust Fund unless paid by the Company.
Notwithstanding the foregoing, the Company shall not have any
obligation to pay any of such expenses.
29. Section 12.3 is amended by adding the following new third paragraph:
A domestic relations order will not fail to be deemed a qualified domestic
relations order merely because it requires the distribution or segregation
of all or part of a Participant's Total Account with respect to an
alternate payee prior to the Participant's earliest retirement age (as
defined in Section 414(p) of the Code) under the Plan. A distribution to an
alternate payee prior to the Participant's attainment of the earliest
retirement age is available only if (a) the order specifies distribution at
that time and (b) if the present value of the alternate payee's benefits
under the Plan exceeds $5,000, the alternate payee consents to such
distribution.
Except as specifically amended hereby, the Plan is hereby reaffirmed in all
respects.
Signed as a sealed Massachusetts instrument effective as of the date stated
above.
UNITED ASSET MANAGEMENT
CORPORATION
December 7, 1999 /s/ William H. Park
- ---------------------------------------- -------------------------------
(Date) William H. Park
Executive Vice President and
Chief Financial Officer
6
SECOND AMENDED AND RESTATED CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT was originally made as of the 1st day of
January, 1993, was amended and restated as of the 1st day of January, 1999, and
is now further amended and restated as of the 1st day of January, 2000, by and
between UNITED ASSET MANAGEMENT CORPORATION, a Delaware corporation, having its
principal office at One International Place, Boston, Massachusetts 02110-2607
(the "Company") and DAVID I. RUSSELL (the "Consultant").
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, the Company desires to expand its operations in the United Kingdom
and Continental Europe;
WHEREAS, the Consultant possesses knowledge regarding certain European
financial markets, and is familiar with the Company and its goals for expansion
in the United Kingdom and Continental Europe;
WHEREAS. The Company desires to retain the services of the Consultant to
advise and assist the Company with research and negotiations regarding potential
acquisition candidates of partners located in Europe;
NOW THEREFORE, in consideration of the mutual agreements and covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Consultant
hereby agree as follows:
1. Term. The Company shall retain the Consultant to provide, and the
Consultant shall provide, his services as described under Section 5 below (the
"Services"), for a one-year period (the "Term"), with such Services to be
performed as reasonably requested by the Company. The Term shall be
automatically renewed for an additional Term of one year on December 31 of each
year, unless earlier terminated by written notice by either party within 30 days
of the end of each year.
2. Consulting Fee. With the expectation that the Consultant shall perform
services an average of 2 days per week during the Term, the Company shall pay
the Consultant a consulting fee at the rate of $180,000 per year.
<PAGE>
3. Expenses. The Company shall reimburse the Consultant for office
expenses incurred during the Term in accordance with applicable budgets approved
by the Company's Board of Directors from time to time, and shall reimburse the
Consultant for one-hundred (100%) of his reasonable travel and living expenses
and other reasonable expenses actually incurred by him in connection with
Services he is performing for the Company. Services and expenses shall be
invoiced on a quarterly basis to the attention of the Company's Chief Financial
Officer. Invoices for such services and expenses shall be paid by the Company
within 30 days of actual receipt by the Company.
4. Termination. Either party may terminate this Agreement at any time
upon 90 days' written notice to the other. In the event of any termination for
any reason, the Consultant shall be paid consulting fees pro rated to the
effective date of termination. All out-of-pocket expenses reasonably incurred
up to the effective date of termination shall in such event also be reimbursed
by the Company.
5. Scope of Work. It is agreed that the Consultant shall:
(a) Attend meetings and contribute advice, guidance, knowledge,
consultancy and direction regarding possible acquisition candidates or
partners located in the United Kingdom and Continental Europe (the
"European Candidates").
(b) Conduct research regarding the European Candidates.
(c) Make initial contacts with the European Candidates in order to
introduce the Company to the European Candidates and to learn more
about them.
(d) Maintain a steady interaction with the European Candidates.
(e) Assist with travel arrangements for Company travel relating to the
European Candidates.
(f) Assist in negotiations with European Candidates.
(g) Such other consulting or other services as the Company may reasonably
request from time to time relating to the development of the Company's
business in the United Kingdom and Continental Europe and such other
locations as the Company and the Consultant agree.
6. Relationship between Consultant and Company. The relationship of the
Consultant to the Company is that of an independent contractor, not that of an
agent or employee, and each party hereto agrees that it shall not represent such
relationship as being
<PAGE>
otherwise to third parties. Nothing contained in this Agreement shall constitute
or be construed to be or create a partnership, joint venture or lease between
the Company and the Consultant. The Consultant shall not have the authority to
bind the Company unless expressly authorized to do so in a particular instance
by vote of the Company's Board of Directors.
7. Binding Agreement. The terms, covenants, conditions, provisions and
agreements herein contained shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
8. Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties hereto, and no prior oral or written, and no
contemporaneous oral, representations or agreements between the parties with
respect to the subject matter of this Agreement shall be of any force and
effect. Any additions, amendments or modifications to this Agreement shall be of
no force and effect unless in writing and signed by both the Consultant and the
Company.
9. Governing Law. This Agreement shall be construed in accordance with
and governed for all purposes by the laws and public policy of The Commonwealth
of Massachusetts applicable to contracts executed and wholly performed within
such Commonwealth. In enforcing such governing laws and public policy, a court
of competent jurisdiction shall afford all relief which a Massachusetts court
would afford under the circumstances.
Executed as an instrument under seal as of the date first written above.
CONSULTANT
/s/ David I. Russell
--------------------
David I. Russell
UNITED ASSET MANAGEMENT
CORPORATION
By: /s/ Franklin H. Kettle
-----------------------
Franklin H. Kettle,
Executive Vice President
November 29, 1999
The Board of Directors of United Asset Management Corporation
c/o Norton H. Reamer, Chairman of the Board and Chief Executive Officer
United Asset Management Corporation
One International Place
Boston, MA 02110
Dear Members of the Board:
I hereby resign from my position as President and Chief Operating Officer of
United Asset Management Corporation ("UAM"), from my position as a Director of
UAM, from any position I may hold as an officer or director of any affiliate of
UAM, and from any other position that I may hold with any pooled investment
vehicle advised by an affiliate of UAM, all effective December 31, 1999.
We have agreed that my Employment Agreement (made as of March 1, 1998) is
amended so that the Term shall end on December 31, 1999. I understand that, in
all other respects, this Employment Agreement shall remain in full force and
effect without amendment. In particular, I acknowledge my obligations under
Section 5 (Confidentiality) under which I will remain obligated to UAM following
the termination of my employment.
Sincerely yours,
/s/ C.E. Haldeman, Jr.
Charles E. Haldeman, Jr.
Acknowledged, accepted and agreed:
UNITED ASSET MANAGEMENT CORPORATION
By: /s/ Norton H. Reamer
-------------------------------------------
Norton H. Reamer, Chairman of the Board
and Chief Executive Officer
Salary Continuation Plan
- --------------------------------------------------------------------------------
Plan for UAM This table summarizes UAM's Salary Continuation Plan
Employees benefits. The Salary Continuation Plan actually consists of
two Plans: one Plan covers officers; the other covers
employees other than officers. You will be notified of any
changes made to the Plans in the future.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Details
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Qualifying event Any involuntary termination by UAM, excluding any terminations for reasons related to job
performance
- ---------------------------------------------------------------------------------------------------------------------------
Who is eligible All UAM employees who are paid directly by UAM and not its affiliates.
- ---------------------------------------------------------------------------------------------------------------------------
How benefit is calculated o Exempt: Based on annual salary plus highest bonus paid for any of the last three
calendar years (when applicable)
o Non-exempt: Based on average of last 52 weeks wages
- ---------------------------------------------------------------------------------------------------------------------------
Base Salary Continuation Pay Annual Cash Compensation Base Salary Continuation Pay
(based on salary + bonus as above)
--------------------------------------------------------------------------------------------
o Up to $50,000 2 months pay
o $50,001 - $100,000 3 months pay
o $100,001 - $150,000 6 months pay
o $150,000 + 9 months pay
- ---------------------------------------------------------------------------------------------------------------------------
Additional Salary o One month pay for each year or partial year of service (measured from the
Continuation Pay employee's start date)
o Maximum term of 24 months (includes base + additional pay)
o Senior VP and above: minimum 24 months; maximum 30 months
- ---------------------------------------------------------------------------------------------------------------------------
Vacation Pay Out Pay out all unused vacation and Paid Leave Bank time where applicable
- ---------------------------------------------------------------------------------------------------------------------------
Benefits Continue medical, dental, life insurance for full term of severance or until re-employed,
whichever is earlier (subject to the reasonable availability of continued coverage after
the 18 month COBRA period).
- ---------------------------------------------------------------------------------------------------------------------------
Options May be vested and/or extended at the Compensation Committee's discretion
- ---------------------------------------------------------------------------------------------------------------------------
Profit Sharing Immediately vests at 100%, in accordance with the terms of the Plan
- ---------------------------------------------------------------------------------------------------------------------------
Pay Out term Regular payroll (monthly)
NOTE: All payments under this Plan are subject to withholdings and other applicable
deductions
- ---------------------------------------------------------------------------------------------------------------------------
Terms of Salary Continues for full term of salary continuation according to the above schedule; if annual
Continuation cash compensation from subsequent employment during the term is lower, UAM will payout
the difference between the Salary Continuation pay calculable above and the new cash
compensation.
- ---------------------------------------------------------------------------------------------------------------------------
Outplacement Reasonable outplacement services will be provided to all employees during the first three
months of severance.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE
----------------------------------------
(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, 1999
Basic Earnings per Share
Income available to common
shareholders $61,287,000 59,160,000 $1.04
======
Effect of Dilutive Securities (1) - 300,000
----------- ----------
Diluted Earnings per Share
Income available to common
shareholders + assumed conversions $61,287,000 59,460,000 $1.03
=========== =========== =====
================================================================================================
For the Year Ended December 31, 1998
Basic Earnings per Share
Income available to common
shareholders $78,507,000 66,158,000 $1.19
=====
Effect of Dilutive Securities (1) - 1,911,000
------------ ----------
Diluted Earnings per Share
Income available to common
shareholders + assumed conversions $78,507,000 68,069,000 $1.15
=========== =========== =====
================================================================================================
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 (1) - -
----------- ----------
Diluted Loss per Share
Loss available to common
shareholders + assumed conversions $(4,133,000) 69,611,000 $(.06)
=========== ========== ======
============================================================ ================================
</TABLE>
(1) Options on 5,629,000, 2,014,000, and 7,013,000 shares of common stock and
warrants on 6,219,000, 1,523,000, and 9,350,000 shares of common stock
were outstanding during 1999, 1998, and 1997, respectively, but were not
included in computing diluted earnings (loss) per share in each of these
years because their effects were antidilutive.
25
UNITED ASSET MANAGEMENT'S CLIENTS
United Asset Management is one of the largest independent investment management
firms in the world. By funding growth, rewarding superior investment
performance, ensuring business stability, and maintaining the autonomy of its
firms, UAM has assembled an outstanding group of independent investment
management affiliates that employ a variety of investment styles to manage a
broad mix of asset classes around the globe.
UAM's firms manage both domestic and international investment portfolios for
corporate, government and union benefit plans, mutual funds, individuals,
endowments, and foundations. As of December 31, 1999, UAM's firms had
approximately $202.6 billion under management with an average account size of
$32.7 million. The mix of assets under management for clients of UAM's firms was
63% U.S. equities, 14% international securities, 12% U.S. bonds and cash, 7%
stable value assets, and 4% real estate. The 20 largest clients of UAM's
affiliates represented 15% of total revenues and the 100 largest clients
represented 29%.
The goal of each of UAM's firms is to provide superior, focused service to its
clients. A sound and consistent investment philosophy, regular communications
and a keen awareness of individual client needs are all critical elements in
providing exceptional client service. To retain existing clients and attract new
prospects, UAM and its affiliates are co-investing in a wide range of
initiatives ranging from client relationship management and back-office systems
to new product development and marketing support. These investments are part of
a stronger, more effective operating partnership between UAM and its affiliates,
and are at the center of UAM's strategy to enhance shareholder value and
increase the internal growth of its firms.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
ASSETS UNDER PERCENT NUMBER AVERAGE
MANAGEMENT OF CLIENTS ACCOUNT SIZE
AS OF DECEMBER 31, 1999 (IN MILLIONS) (IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate employee benefit plans $ 68,978 34.0% 1,448 $ 47.6
- ------------------------------------------------------------------------------------------------------------------------------------
Mutual funds 50,572 25.0 239 211.6
- ------------------------------------------------------------------------------------------------------------------------------------
Government employee benefit plans 32,203 15.9 325 99.1
- ------------------------------------------------------------------------------------------------------------------------------------
Individuals 23,906 11.8 3,052(1) 7.8
- ------------------------------------------------------------------------------------------------------------------------------------
Endowments and foundations 12,253 6.0 672 18.2
- ------------------------------------------------------------------------------------------------------------------------------------
Union member benefit plans 11,462 5.7 272 42.1
- ------------------------------------------------------------------------------------------------------------------------------------
Professional groups 1,746 .9 154 11.3
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate cash reserves 1,498 .7 30 49.9
- ------------------------------------------------------------------------------------------------------------------------------------
$202,618 100.0% 6,192 $ 32.7
====================================================================================================================================
</TABLE>
(1) These clients include 110 wrap-fee relationships with brokerage firms that
represent approximately 31,000 individual accounts with $10.1 billion
under management.
<PAGE>
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
The principal business activities of UAM are investment advisory services,
primarily for institutional clients, and the acquisition of institutional
investment management firms. The Company's wholly owned subsidiaries operate in
one business segment, that is, as investment advisers, managing both domestic
and international investment portfolios for corporate, government and union
benefit plans, mutual funds, individuals, endowments, and foundations.
The revenues of UAM's affiliated firms are derived primarily from fees for
investment advisory services provided to institutional and other clients.
Investment advisory fees are generally a function of the overall fee rate
charged to each account and the level of assets under management by the
affiliated firms. A minor portion of revenues is generated when firms consummate
transactions for client portfolios. Assets under management can be affected by
the addition of new client accounts or client contributions to existing
accounts, withdrawals of assets from or terminations of client accounts, and
investment performance, which may depend on general market conditions.
AMORTIZATION OF COST ASSIGNED TO CONTRACTS ACQUIRED
Cost assigned to contracts acquired, net of accumulated amortization,
represented approximately 64% of the Company's total assets as of December 31,
1999. Amortization of cost assigned to contracts acquired, which is a noncash
charge, represented 15% of the Company's operating expenses. Recording the cost
assigned to contracts acquired as an asset, with the resulting amortization as
an operating expense, reflects the application of generally accepted accounting
principles to acquisitions by UAM of investment management firms in transactions
accounted for as purchases. The principal assets acquired are the investment
advisory contracts that evidence the firms' ongoing relationships with their
clients.
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.
The Company regularly performs reviews of the remaining estimated lives as well
as for potential impairment of the value of acquired contracts. If any review
were to indicate that any of the estimated lives should be shortened, the
remaining cost assigned to contracts acquired would be amortized over the
shorter life commencing in the year in which the new estimate is determined. If
any review were to indicate that the carrying value of the contracts is
impaired, the asset would be 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.
RESULTS OF OPERATIONS
Revenues were $882,306,000, $961,854,000, and $941,621,000 for the years ended
December 31, 1999, 1998, and 1997, respectively. Revenues declined in 1999 due
to the effect of negative net client cash flow and the sale of Heitman Financial
LLC's non-retail property management operation in 1998, partially offset by the
impact of positive market performance achieved by UAM's affiliated firms. The
increase in revenues in 1998 was the result of positive portfolio performance
achieved by UAM's affiliated firms as well as purchase business combinations in
1998 and 1997, partially offset by the effect of net client cash outflows.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
27
In addition, in 1998, UAM received life insurance proceeds as a result of the
death of an executive. The revenues of J.R. Senecal & Associates Investment
Counsel Corp., Pacific Financial Research, Inc., Thomson Horstmann & Bryant,
Inc., Lincluden Management Limited and Integra Capital Management Corporation
have been included since their acquisition dates of January 7, 1997, May 29,
1997, June 6, 1997, September 4, 1997, and January 6, 1998, respectively.
Assets under management totaled $202.6 billion at December 31, 1999 compared to
$201.4 billion at December 31, 1998 and $197.5 billion at December 31, 1997. The
net increase in assets under management of $1.2 billion during 1999 consisted of
investment performance of $22.5 billion, partially offset by negative net client
cash flow of $21.1 billion. The sale of an affiliate, Nelson, Benson & Zellmer,
Inc., subtracted approximately $200 million from total year-end assets. The net
increase in assets under management of $3.9 billion during 1998 consisted of
investment performance of $21.2 billion and acquisitions totaling $2.5 billion,
partially offset by negative net client cash flow of $19.8 billion. UAM is
undertaking a number of initiatives focused on improving net client cash flow.
Compensation and related expenses was $438,346,000 in 1999, $474,721,000 in
1998, and $470,372,000 in 1997. In accordance with revenue sharing plans and
consistent with the change in revenues, employees of existing affiliated firms
earned less compensation in 1999 than in 1998, and earned more compensation in
1998 than in 1997. Amortization of cost assigned to contracts acquired was
$105,488,000 in 1999, $113,296,000 in 1998, and $105,242,000 in 1997. The
decrease in 1999 was the result of various factors including certain cost
assigned to contracts acquired being fully amortized at the end of 1998,
partially offset by the recording of additional purchase price commitments
associated with prior-year acquisitions. The increase in 1998 was primarily due
to the acquisitions described above. Other operating expenses were $162,156,000
in 1999, $179,342,000 in 1998, and $163,927,000 in 1997. The decrease in 1999
was primarily the result of the closing of an affiliate as well as the
restructuring of two other affiliates, partially offset by the higher costs of
marketing, client service and product development. The increase in 1998 reflects
the acquisitions described above as well as the higher costs of marketing,
client service and product development. The Company expects to continue the
investments it makes with affiliates in marketing, distribution and new product
development. Furthermore, the Company plans to continue supporting firms at
various stages of development.
During the fourth quarter of 1997, the Company recorded a noncash charge
reducing the recorded value of intangible assets to reflect an impairment of the
cost assigned to contracts acquired of $170,982,000 ($99,347,000 net of taxes)
due to a projected decline in revenues at two affiliates. The assets were
reduced to their estimated fair value.
Interest expense was $70,067,000 in 1999, $60,275,000 in 1998, and $43,156,000
in 1997. The increase in interest expense during these years was the result of
increases in both the Company's average debt levels and the average interest
rates charged on borrowings.
Income before income taxes was $107,154,000 in 1999 and $137,249,000 in 1998
compared to a loss before income taxes of $7,223,000 in 1997, primarily as a
result of the events described above. Net income was $61,287,000 in 1999 and
$78,507,000 in 1998 compared to a net loss of $4,133,000 in 1997. Diluted
earnings per share were $1.03 in 1999 and $1.15 in 1998 compared to a diluted
loss per share of $.06 in 1997. Amortization of cost assigned to contracts
acquired per share increased to $1.77 in 1999 from $1.66 in 1998, and $1.44 in
1997.
<PAGE>
28
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Net income (loss) plus amortization and depreciation (including the reduction
in value of intangible assets, net of taxes, in 1997) was $189,872,000 in 1999,
$211,404,000 in 1998, and $213,652,000 in 1997, and EBITDA (earnings before
interest, taxes, depreciation and amortization, including the reduction in value
of intangible assets in 1997) was $300,200,000 in 1999, $322,916,000 in 1998,
and $318,076,000 in 1997, primarily as a result of the circumstances discussed
above. Management uses these two statistics not to the exclusion of net income
(loss), but rather as an additional important measure of the Company's
performance.
Excluding the effects of the 1997 reduction in value of intangible assets of
$170,982,000,net income was $95,214,000 and diluted earnings per share were
$1.31 in 1997.
FINANCIAL CONDITION AND LIQUIDITY
The Company's internally generated cash totaled $189,872,000 in 1999. This cash
and additional borrowings under the Company's line of credit were primarily used
to repurchase shares of the Company's common stock for $139,345,000, to pay
dividends to shareholders totaling $47,785,000, and to finance the $14,001,000
cash portion of prior acquisition activity. As of December 31, 1999, the Company
had working capital of $82,391,000 and had drawn down $297,000,000, leaving
$453,000,000 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
internally generated cash 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 provide further support for
investing with existing affiliates, to repurchase shares of the Company's
common stock, to pay shareholder dividends, to acquire additional investment
management firms, and to fund commitments due or potentially due to former
owners of affiliated firms.
The Company is taking steps to refocus operations that do not meet strategic
objectives. This has allowed the Company and its affiliates to reallocate
resources toward more efficient uses. Management is also increasing its support
for growth initiatives at individual affiliates in areas such as product
development, client service, marketing, technology, and other areas. The Company
plans to continue acquiring investment management firms, focusing on firms that
will enhance the business of existing affiliates, provide entry to new channels
of distribution, or boost the Company's participation in attractive asset
classes that are currently under-represented among its firms.
In addition, the Company is customizing incentives it offers its affiliates in
innovative ways that encourage growth. UAM is modifying its economic
relationship with some of its affiliates to enable the principals to hold equity
in their own firms.
Increases or decreases in interest rates affect UAM's costs of operations
chiefly through raising or lowering the interest expense related to the
Company's variable-rate debt outstanding. To mitigate the risks associated with
increases in interest rates, UAM has entered into and plans to continue to enter
into interest-rate protection agreements (see Notes 1 and 3 to the Consolidated
Financial Statements included in this Annual Report). Rates of interest on the
$400,000,000 of Senior Notes and the existing subordinated debt are fixed.
Increases and decreases in interest rates may also affect market prices of
assets managed by the Company's affiliated firms. Changes in such prices may
affect the affiliated firms' revenues, and therefore UAM's consolidated
revenues.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
29
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 inflation and price changes.
YEAR 2000 AND OTHER SYSTEM-RELATED ISSUES
The Company has not experienced any significant complications or disruptions as
a result of the "Year 2000 issue." Although the Company does not anticipate
future Y2K issues, contingency plans are in place. The Company and its
affiliates have incurred expenses to mitigate risks associated with the worst
reasonably likely failures of systems. Since 1997, these costs, which
principally represent consulting fees, have totaled approximately $1,900,000,
and the Company expects to incur an additional $100,000 during the quarter
ending March 31, 2000. These costs are being expensed as incurred.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). This statement establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. In 1999, Statement of Financial
Accounting Standards No. 137 was issued, which extends the effective date of FAS
133 to June 15, 2000. Based on current activities, this standard is not expected
to have a material impact on the Company's consolidated financial position, its
consolidated results of operations or its consolidated cash flows.
FORWARD-LOOKING STATEMENTS
The Company's management may make "forward-looking" statements in this Annual
Report, the Company's Form 10-K for 1999, in other documents filed with the SEC
(including those documents incorporated by reference into the Form 10-K), in
press releases, and in discussions with analysts, investors and others. These
statements include: (1) descriptions of UAM's operational plans; (2)
expectations about future earnings and other results of operations; (3) views of
future industry or market conditions; and (4) other statements that include
words like "may," "expects," "believes," and "intends," and that describe
opinions about future events. Investors should not rely on these statements as
though they were guarantees. These statements are current only when they are
made. UAM's management has no obligation to revise or update these statements
based on future developments.
Known and unknown risks may cause the Company's actual results and performances
to be materially different from those expressed or implied by these statements.
Some of these risks, uncertainties and other factors are that: most of UAM's
revenues are based on the market value of managed assets and, therefore, will
rise and fall with changes in the economy and financial markets; the investment
management business is highly competitive; the investment management business is
susceptible to internal shifts and frequently requires firms to adapt; UAM's
affiliated firms depend significantly on key employees; 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, 1999 filed with the SEC.
<PAGE>
30
- --------------------------------------------------------------------------------
ELEVEN-YEAR REVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
In thousands, unless otherwise indicated, 1999 1998 1997 1996(1)
except per-share amounts.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF Revenues $ 882,306 $ 961,854 $ 941,621 $ 883,267
OPERATIONS ------------------------------------------------------------------------------------------------------------
DATA Operating expenses:
------------------------------------------------------------------------------------------------------------
Compensation and related expenses 438,346 474,721 470,372 431,877
----------------------------------------------------------------------------------------------------------
Amortization of cost assigned
to contracts acquired 105,488 113,296 105,242 101,935
----------------------------------------------------------------------------------------------------------
Other operating expenses 162,156 179,342 163,927 138,450
----------------------------------------------------------------------------------------------------------
Reduction in value of intangible assets -- -- 170,982(2) --
----------------------------------------------------------------------------------------------------------
705,990 767,359 910,523 672,262
------------------------------------------------------------------------------------------------------------
Operating income 176,316 194,495 31,098 211,005
------------------------------------------------------------------------------------------------------------
Interest expense, net
and other amortization 69,162 57,246 38,321 39,757
------------------------------------------------------------------------------------------------------------
Income (loss) before
income tax expense (benefit) 107,154 137,249 (7,223) 171,248
------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 45,867 58,742 (3,090) 73,426
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 61,287 $ 78,507 $ (4,133) $ 97,822
============================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
PER-SHARE Basic earnings (loss) per share $1.04 $1.19 $(.06) $1.43
DATA ------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $1.03 $1.15 $(.06) $1.36
------------------------------------------------------------------------------------------------------------
Dividends declared per share $ .80 $ .80 $ .77 $ .66
------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA Cash Earnings(3) $ 189,872 $ 211,404 $ 213,652 $ 211,371
------------------------------------------------------------------------------------------------------------
Assets under management
at end of year (in millions) $ 202,618 $ 201,393 $ 197,489 $ 171,027
------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET Total assets $ 1,321,691 $ 1,439,511 $ 1,513,500 $ 1,449,049
DATA ------------------------------------------------------------------------------------------------------------
Cost assigned to contracts
acquired, net $ 841,454 $ 931,815 $ 1,018,172 $ 959,886
------------------------------------------------------------------------------------------------------------
Long-term debt
(including current portion) $ 882,138 $ 890,361 $ 773,255 $ 610,967
------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 185,120 $ 269,844 $ 458,152 $ 552,244
------------------------------------------------------------------------------------------------------------
Number of common shares
outstanding at the end of the year 57,173 61,554 69,257 68,711
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonrecurring gains contributed approximately $12,000,000 to revenues, or
$.10 to earnings per share.
(2) Reduction in value of intangible assets of approximately $170,982,000 was
charged to operating expenses ($99,347,000 net of taxes), or $1.37 to loss
per share.
(3) Net income (loss) plus amortization and depreciation, previously referred
to as "Operating Cash Flow." 1997 includes the reduction in value of
intangible assets, net of taxes.
(4) 10-year annual compound growth rate.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------
In thousands, unless otherwise indicated, 1995 1994 1993 1992
except per-share amounts.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF Revenues $ 734,353 $ 521,369 $ 476,729 $ 396,074
OPERATIONS ------------------------------------------------------------------------------------------------------------
DATA Operating expenses:
------------------------------------------------------------------------------------------------------------
Compensation and related expenses 362,516 261,031 237,403 200,884
----------------------------------------------------------------------------------------------------------
Amortization of cost assigned
to contracts acquired 93,192 55,121 48,493 37,279
----------------------------------------------------------------------------------------------------------
Other operating expenses 115,454 86,895 78,537 70,650
----------------------------------------------------------------------------------------------------------
Reduction in value of intangible assets -- -- -- --
----------------------------------------------------------------------------------------------------------
571,162 403,047 364,433 308,813
------------------------------------------------------------------------------------------------------------
Operating income 163,191 118,322 112,296 87,261
------------------------------------------------------------------------------------------------------------
Interest expense, net
and other amortization 44,181 12,829 15,328 16,232
------------------------------------------------------------------------------------------------------------
Income (loss) before
income tax expense (benefit) 119,010 105,493 96,968 71,029
------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 51,754 45,108 41,989 30,298
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 67,256 $ 60,385 $ 54,979 $ 40,731
============================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
PER-SHARE Basic earnings (loss) per share $.99 $.95 $.92 $.76
DATA ------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $.95 $.90 $.84 $.68
------------------------------------------------------------------------------------------------------------
Dividends declared per share $.58 $.50 $.42 $.34
------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA Cash Earnings(3) $ 169,008 $ 121,979 $ 109,552 $ 83,681
------------------------------------------------------------------------------------------------------------
Assets under management
at end of year (in millions) $ 151,606 $ 111,507 $ 106,082 $ 90,240
------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET Total assets $ 1,419,031 $ 947,598 $ 708,412 $ 658,900
DATA ------------------------------------------------------------------------------------------------------------
Cost assigned to contracts
acquired, net $ 1,055,676 $ 674,526 $ 480,101 $ 460,523
------------------------------------------------------------------------------------------------------------
Long-term debt
(including current portion) $ 680,300 $ 369,268 $ 216,230 $ 275,110
------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 491,769 $ 406,158 $ 358,301 $ 288,751
------------------------------------------------------------------------------------------------------------
Number of common shares
outstanding at the end of the year 67,540 63,772 61,530 56,986
------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------
In thousands, unless otherwise indicated, 1991 1990 1989 GROWTH(4)
except per-share amounts. RATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF Revenues $ 324,772 $ 268,022 $ 227,745 14.5%
OPERATIONS ------------------------------------------------------------------------------------------------------
DATA Operating expenses:
------------------------------------------------------------------------------------------------------
Compensation and related expenses 163,054 130,095 108,595 15.0%
----------------------------------------------------------------------------------------------------
Amortization of cost assigned
to contracts acquired 30,535 27,157 23,808 16.1%
----------------------------------------------------------------------------------------------------
Other operating expenses 58,825 57,665 43,446 14.1%
----------------------------------------------------------------------------------------------------
Reduction in value of intangible assets -- -- -- --
----------------------------------------------------------------------------------------------------
252,414 214,917 175,849 14.9%
------------------------------------------------------------------------------------------------------
Operating income 72,358 53,105 51,896 13.0%
------------------------------------------------------------------------------------------------------
Interest expense, net
and other amortization 17,040 13,158 13,166 18.0%
------------------------------------------------------------------------------------------------------
Income (loss) before
income tax expense (benefit) 55,318 39,947 38,730 10.7%
------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 22,936 16,664 15,107 11.7%
------------------------------------------------------------------------------------------------------
Net income (loss) $ 32,382 $ 23,283 $ 23,623 10.0%
======================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
PER-SHARE Basic earnings (loss) per share $.65 $.48 $.51 7.4%
DATA ------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $.58 $.44 $.45 8.6%
------------------------------------------------------------------------------------------------------
Dividends declared per share $.28 $.22 $.17 16.8%
------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING DATA Cash Earnings(3) $ 67,572 $ 54,772 $ 51,416 14.0%
------------------------------------------------------------------------------------------------------
Assets under management
at end of year (in millions) $ 76,182 $ 58,123 $ 53,319 14.3%
------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET Total assets $ 532,610 $ 461,626 $ 406,952 --
DATA ------------------------------------------------------------------------------------------------------
Cost assigned to contracts
acquired, net $ 343,421 $ 320,940 $ 292,199 --
------------------------------------------------------------------------------------------------------
Long-term debt
(including current portion) $ 208,475 $ 190,635 $ 157,459 --
------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 226,904 $ 190,185 $ 175,528 --
------------------------------------------------------------------------------------------------------
Number of common shares
outstanding at the end of the year 50,926 47,986 46,518 --
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
32
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Current assets:
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 123,754,000 $ 153,616,000
-------------------------------------------------------------------------------------------------------
Investment advisory fees receivable 169,566,000 169,061,000
-------------------------------------------------------------------------------------------------------
Other current assets 11,621,000 12,419,000
---------------------------------------------------------------------------------------------------------
Total current assets 304,941,000 335,096,000
---------------------------------------------------------------------------------------------------------
Fixed assets, net 37,391,000 42,148,000
---------------------------------------------------------------------------------------------------------
Cost assigned to contracts acquired, net of
accumulated amortization of $700,410,000 in 1999
and $598,621,000 in 1998 841,454,000 931,815,000
---------------------------------------------------------------------------------------------------------
Other assets 137,905,000 130,452,000
---------------------------------------------------------------------------------------------------------
Total assets $1,321,691,000 $1,439,511,000
=========================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND Current liabilities:
STOCKHOLDERS' ---------------------------------------------------------------------------------------------------------
EQUITY Accounts payable and accrued expenses $ 134,556,000 $ 143,559,000
-------------------------------------------------------------------------------------------------------
Accrued compensation 87,994,000 108,222,000
---------------------------------------------------------------------------------------------------------
Total current liabilities 222,550,000 251,781,000
---------------------------------------------------------------------------------------------------------
Senior notes payable 700,401,000 687,521,000
---------------------------------------------------------------------------------------------------------
Subordinated notes payable 181,737,000 202,840,000
---------------------------------------------------------------------------------------------------------
Deferred income taxes 31,883,000 27,525,000
---------------------------------------------------------------------------------------------------------
Total liabilities 1,136,571,000 1,169,667,000
---------------------------------------------------------------------------------------------------------
Commitments and contingencies
---------------------------------------------------------------------------------------------------------
Stockholders' equity:
---------------------------------------------------------------------------------------------------------
Common stock, par value $.01 per share
Authorized: 200,000,000 shares
Issued: 70,346,577 shares in 1999 and 1998 703,000 703,000
-------------------------------------------------------------------------------------------------------
Capital in excess of par value 361,808,000 360,781,000
-------------------------------------------------------------------------------------------------------
Retained earnings 139,044,000 140,751,000
-------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (6,495,000) (10,132,000)
-------------------------------------------------------------------------------------------------------
495,060,000 492,103,000
-------------------------------------------------------------------------------------------------------
Less treasury shares at cost: 13,173,451 shares
in 1999 and 8,792,879 in 1998 (309,940,000) (222,259,000)
---------------------------------------------------------------------------------------------------------
Total stockholders' equity 185,120,000 269,844,000
---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,321,691,000 $1,439,511,000
=========================================================================================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES Revenues $ 882,306,000 $ 961,854,000 $ 941,621,000
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING Compensation and related expenses 438,346,000 474,721,000 470,372,000
EXPENSES ------------------------------------------------------------------------------------------------------------
Amortization of cost assigned
to contracts acquired 105,488,000 113,296,000 105,242,000
------------------------------------------------------------------------------------------------------------
Other operating expenses 162,156,000 179,342,000 163,927,000
------------------------------------------------------------------------------------------------------------
Reduction in value of intangible assets -- -- 170,982,000
------------------------------------------------------------------------------------------------------------
705,990,000 767,359,000 910,523,000
------------------------------------------------------------------------------------------------------------
Operating income 176,316,000 194,495,000 31,098,000
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
NON-OPERATING Interest expense, net 64,461,000 52,770,000 35,879,000
EXPENSES ------------------------------------------------------------------------------------------------------------
Other amortization 4,701,000 4,476,000 2,442,000
------------------------------------------------------------------------------------------------------------
69,162,000 57,246,000 38,321,000
------------------------------------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) 107,154,000 137,249,000 (7,223,000)
------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) 45,867,000 58,742,000 (3,090,000)
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME Net income (loss) $ 61,287,000 $ 78,507,000 $ (4,133,000)
(LOSS) ============================================================================================================
Basic earnings (loss) per share $1.04 $1.19 $(.06)
============================================================================================================
Diluted earnings (loss) per share $1.03 $1.15 $(.06)
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
34
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOW Net income (loss) $ 61,287,000 $ 78,507,000 $ (4,133,000)
RELATED TO ---------------------------------------------------------------------------------------------------------
OPERATING Adjustments to reconcile net income (loss)
ACTIVITIES to net cash flow from operating activities:
---------------------------------------------------------------------------------------------------------
Amortization of cost assigned
to contracts acquired 105,488,000 113,296,000 105,242,000
-------------------------------------------------------------------------------------------------------
Depreciation 15,160,000 13,767,000 10,754,000
-------------------------------------------------------------------------------------------------------
Amortization of goodwill and other 7,937,000 5,834,000 2,442,000
-------------------------------------------------------------------------------------------------------
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 189,872,000 211,404,000 213,652,000
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN Decrease (increase) in investment
ASSETS AND advisory fees receivable (724,000) 12,181,000 (35,970,000)
LIABILITIES ---------------------------------------------------------------------------------------------------------
Decrease (increase) in other current assets 868,000 (513,000) (43,000)
---------------------------------------------------------------------------------------------------------
Increase (decrease) in accounts payable
and accrued expenses (6,044,000) 21,560,000 7,134,000
---------------------------------------------------------------------------------------------------------
Increase (decrease) in accrued compensation (19,757,000) (35,276,000) 27,795,000
---------------------------------------------------------------------------------------------------------
Increase (decrease) in deferred income taxes (263,000) 2,669,000 919,000
---------------------------------------------------------------------------------------------------------
Net cash flow from operating activities 163,952,000 212,025,000 213,487,000
---------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW Purchase of fixed assets (10,445,000) (14,828,000) (21,715,000)
RELATED TO ---------------------------------------------------------------------------------------------------------
INVESTING Cash additions to cost assigned
ACTIVITIES to contracts acquired (8,231,000) (18,477,000) (152,068,000)
---------------------------------------------------------------------------------------------------------
Change in other assets (12,278,000) (43,247,000) (8,866,000)
---------------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (30,954,000) (76,552,000) (182,649,000)
---------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW Purchase of treasury shares (139,345,000) (270,579,000) (76,411,000)
RELATED TO ---------------------------------------------------------------------------------------------------------
FINANCING Additions to notes payable 70,200,000 237,501,000 303,161,000
ACTIVITIES ---------------------------------------------------------------------------------------------------------
Reductions in notes payable (65,588,000) (94,112,000) (313,619,000)
---------------------------------------------------------------------------------------------------------
Issuance or reissuance of equity securities 20,410,000 25,924,000 29,029,000
---------------------------------------------------------------------------------------------------------
Dividends paid (47,785,000) (53,675,000) (51,543,000)
---------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (162,108,000) (154,941,000) (109,383,000)
---------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes
on cash flow (752,000) (554,000) 3,784,000
---------------------------------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (29,862,000) (20,022,000) (74,761,000)
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of year 153,616,000 173,638,000 248,399,000
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 123,754,000 $ 153,616,000 $ 173,638,000
=========================================================================================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK Balance, beginning of year $ 703,000 $ 703,000 $ 692,000
AT PAR VALUE ------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants -- -- 11,000
------------------------------------------------------------------------------------------------------------
Balance, end of year 703,000 703,000 703,000
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL Balance, beginning of year 360,781,000 357,239,000 346,017,000
IN EXCESS OF ------------------------------------------------------------------------------------------------------------
PAR VALUE Exercise of stock options and warrants 1,027,000 3,291,000 9,928,000
------------------------------------------------------------------------------------------------------------
Issuance of warrants -- 251,000 1,294,000
------------------------------------------------------------------------------------------------------------
Balance, end of year 361,808,000 360,781,000 357,239,000
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED Balance, beginning of year 140,751,000 133,291,000 216,989,000
EARNINGS ------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants (16,042,000) (18,912,000) (25,852,000)
------------------------------------------------------------------------------------------------------------
Net income (loss) 61,287,000 78,507,000 (4,133,000)
------------------------------------------------------------------------------------------------------------
Dividends declared ($.80, $.80, $.77 per share) (46,952,000) (52,135,000) (53,713,000)
------------------------------------------------------------------------------------------------------------
Balance, end of year 139,044,000 140,751,000 133,291,000
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED Balance, beginning of year (10,132,000) (4,369,000) 714,000
OTHER ------------------------------------------------------------------------------------------------------------
COMPREHENSIVE Foreign currency translation adjustment, net of tax 4,016,000 (7,026,000) (5,083,000)
INCOME (LOSS) ------------------------------------------------------------------------------------------------------------
Unrealized gain on marketable securities, net of tax 812,000 1,263,000 --
------------------------------------------------------------------------------------------------------------
Reclassification adjustment for gains
realized in net income, net of tax (1,191,000) -- --
------------------------------------------------------------------------------------------------------------
Balance, end of year (6,495,000) (10,132,000) (4,369,000)
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TREASURY SHARES Balance, beginning of year (222,259,000) (28,712,000) (12,168,000)
AT COST ------------------------------------------------------------------------------------------------------------
Issuance of stock 35,000 19,007,000 --
------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 51,629,000 58,025,000 59,867,000
------------------------------------------------------------------------------------------------------------
Purchase of treasury shares (139,345,000) (270,579,000) (76,411,000)
------------------------------------------------------------------------------------------------------------
Balance, end of year (309,940,000) (222,259,000) (28,712,000)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity $185,120,000 $269,844,000 $458,152,000
============================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES ISSUED Balance, beginning of year 70,346,577 70,346,577 69,217,426
------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants -- -- 1,129,151
------------------------------------------------------------------------------------------------------------
Balance, end of year 70,346,577 70,346,577 70,346,577
------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TREASURY SHARES Balance, beginning of year (8,792,879) (1,089,548) (506,046)
------------------------------------------------------------------------------------------------------------
Issuance of stock 51,584 769,000 --
------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,953,444 2,255,769 2,284,398
------------------------------------------------------------------------------------------------------------
Purchase of treasury shares (6,385,600) (10,728,100) (2,867,900)
------------------------------------------------------------------------------------------------------------
Balance, end of year (13,173,451) (8,792,879) (1,089,548)
------------------------------------------------------------------------------------------------------------
Shares outstanding 57,173,126 61,553,698 69,257,029
============================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE Net income (loss) $ 61,287,000 $ 78,507,000 $ (4,133,000)
INCOME (LOSS) ------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 3,637,000 (5,763,000) (5,083,000)
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 64,924,000 $ 72,744,000 $ (9,216,000)
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The principal business activities of United Asset Management Corporation (the
Company) are investment advisory services, primarily for institutional clients,
and the acquisition of institutional investment management firms. The Company's
wholly owned subsidiaries operate in one business segment, that is, as
investment advisers, managing both domestic and international investment
portfolios for corporate, government and union benefit plans, mutual funds,
individuals, endowments, and foundations. While the Company's subsidiaries
primarily specialize in the management of U.S. equities, bonds and cash, other
asset classes under management include international securities, real estate,
and stable value assets.
The Company has arrangements with most of its affiliates and certain of their
principal officers to share revenues (revenue sharing plans). Under these
revenue sharing plans, the affiliates retain a portion (determined by formula)
of their revenues to meet all their operating expenses, including compensation,
at the discretion of the subsidiaries' management. The remaining portion of
those revenues is used by the Company to meet its operating and cash flow needs.
All operating expenses incurred by the affiliates are charged to operations and
reported as compensation and related expenses or as other operating expenses in
these consolidated financial statements.
CONSOLIDATION
The Company's consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Inter-company balances and transactions
have been eliminated.
REVENUE RECOGNITION
The majority of the Company's revenues are derived from fees for investment
advisory services provided to institutional and other clients. Investment
advisory fees are generally a function of the overall fee rate charged to each
account and the level of assets under management by the affiliated firms. Assets
under management can be affected by the addition of new client accounts or
client contributions to existing accounts, withdrawals of assets from or
terminations of client accounts, and investment performance, which may depend on
general market conditions. Any fees collected in advance are deferred and
recognized as income over the period earned. Transaction-based fees, including
performance fees, are recognized when all contractual obligations have been
satisfied. All investment advisory fees receivable are expected to be collected.
FIXED ASSETS AND DEPRECIATION
Equipment and other fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of
the lease.
COST ASSIGNED TO CONTRACTS ACQUIRED AND GOODWILL
The purchase price for the acquisition of a firm acquired in a business
combination accounted for as a purchase transaction is allocated based on the
fair value of the net assets acquired, primarily investment advisory contracts.
The cost assigned to contracts acquired is amortized using the straight-line
method over periods ranging from five to 20 years. These lives represent the
estimated weighted average lives of the contracts acquired and are based
generally on the historical experience of the individual companies acquired. The
estimated remaining weighted average lives of contracts acquired are
periodically reevaluated. If experience after the acquisition indicates that the
estimate of the average remaining lives should be shortened, the cost assigned
to contracts acquired will be amortized over the shorter life commencing in the
year in which the new estimate is determined.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
37
Amounts paid to certain key employees for entering into long-term employment
contracts and noncompete agreements at the time of purchase business
combinations are included in cost assigned to contracts acquired and are
amortized on a straight-line basis over the lives of such arrangements. Purchase
price in excess of the fair value of the net assets acquired is recorded as
goodwill and amortized using the straight-line method over 40 years. Goodwill,
net of accumulated amortization, was $85,076,000 and $83,493,000 at December 31,
1999 and 1998, respectively, and is included in other assets on the accompanying
consolidated balance sheet.
The Company evaluates its long-lived assets for impairment when circumstances
indicate that the carrying value of such assets may not be fully recoverable.
Such an evaluation compares the carrying value of the asset against the
estimated undiscounted future cash flows associated with the asset. If the
evaluation indicates that the undiscounted future cash flows are not sufficient
to recover the carrying value of the asset, the asset is adjusted to its
estimated fair value. During the fourth quarter of 1997, due to a projected
decline in revenues at two affiliates, the Company recorded a noncash reduction
in value of intangible assets to reflect an impairment of the cost assigned to
contracts acquired. The Company estimated the fair value of the contracts based
on estimated discounted cash flow projections. The total impairment charge was
$170,982,000 ($99,347,000 net of taxes).
RETIREMENT AND PENSION PLANS
The Company has certain retirement and pension plans which cover eligible
employees of the Company and its subsidiaries. All plans are defined
contribution retirement plans, with the exception of two defined benefit pension
plans maintained by subsidiaries. The expense related to all plans was
$12,412,000, $11,631,000, and $11,780,000 in 1999, 1998, and 1997, respectively.
Plan assets, liabilities, and pension expense relating to these plans are not
significant in relation to the Company's consolidated financial statements.
STOCK-BASED COMPENSATION PLANS
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123), the Company accounts for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). (See Note 5.)
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing income (loss) available
to common shareholders by the weighted-average common shares outstanding during
the period. Diluted earnings (loss) per share are computed by giving effect to
all dilutive potential common shares that were outstanding during the period.
Following is a reconciliation of the numerators and denominators used in
calculating basic and diluted earnings (loss) per share:
----------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator:
- --------------------------------------------------------------------------------
Net income (loss) for
basic and diluted earnings
(loss) per share $ 61,287,000 $ 78,507,000 $ (4,133,000)
================================================================================
Denominator:
- --------------------------------------------------------------------------------
Weighted average common
shares -- basic calculation 59,160,000 66,158,000 69,611,000
- --------------------------------------------------------------------------------
Effect of dilutive securities 300,000 1,911,000 --
- --------------------------------------------------------------------------------
Weighted average common
shares -- diluted calculation 59,460,000 68,069,000 69,611,000
================================================================================
Basic earnings (loss)
per share $ 1.04 $ 1.19 $ (.06)
================================================================================
Diluted earnings (loss)
per share $ 1.03 $ 1.15 $ (.06)
================================================================================
During 1999, 1998, and 1997, options on 5,629,000, 2,014,000, and 7,013,000
shares of common stock and warrants on 6,219,000, 1,523,000, and 9,350,000
shares of common stock were outstanding, respectively, but were not included in
computing diluted earnings (loss) per share in each of these years because their
effects were antidilutive.
<PAGE>
38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash equivalents represent highly liquid investments purchased with a remaining
maturity of three months or less. The Company invests its excess cash in
deposits with major banks, in money market funds, or in securities composed
primarily of commercial paper of companies with strong credit ratings in
diversified industries for all of which cost approximates fair value. At
December 31, 1999 and 1998, cash equivalents included $2,677,000 and $8,454,000,
respectively, of short-term interest-bearing debt securities, which were
classified as held to maturity.
INVESTMENTS IN MUTUAL FUNDS
The Company invests in mutual funds advised by the Company's affiliates. In
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, these securities are
classified as available-for-sale and, as such, unrealized gains (losses) are
recorded as a component of accumulated other comprehensive income on the
accompanying consolidated balance sheet.
At December 31, 1999, the fair value and cost basis of these investments totaled
$5,959,000 and $4,485,000, respectively. At December 31, 1998, the fair value
and cost basis of these investments totaled $7,564,000 and $6,301,000,
respectively. For the year ended December 31, 1999, gross realized gains from
sales of available-for-sale securities were $1,191,000. For the year ended
December 31, 1998, gross realized gains from sales of available-for-sale
securities were not material. The cost of securities sold is based on the
specific identification method. Tax effects related to the unrealized gains on
marketable securities, as well as the reclassification adjustment for gains
realized in net income, are not considered material.
FOREIGN OPERATIONS
The financial statements of all non-U.S. subsidiaries are translated into U.S.
dollars as follows: assets and liabilities at year-end exchange rates; income,
expenses and cash flows at average exchange rates; and stockholders' equity at
historical exchange rates. The resulting translation adjustment is recorded as a
component of accumulated other comprehensive income on the accompanying
consolidated balance sheet. Any related tax effects are not considered material.
INTEREST-RATE PROTECTION AGREEMENTS
The Company periodically enters into interest-rate protection agreements to
reduce the potential impact of interest-rate increases associated with the
Company's outstanding variable-rate borrowings. Premiums paid for these
instruments are amortized as interest expense over the terms of the agreements.
Any amounts receivable under these agreements are recorded as a reduction of
interest expense.
DEFERRED INCENTIVE COMPENSATION PLAN
The Company has a deferred incentive compensation plan for employees of
affiliates that is based on each affiliate's growth. The deferred compensation
is payable over seven years and is subject to increases or decreases in value
during that period based on performance. The expense of this incentive plan is
recorded over the period in which the incentive compensation is earned.
USE OF ESTIMATES AND RECLASSIFICATIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts and disclosures reported in the accompanying consolidated
financial statements. Certain amounts have been reclassified to conform with the
current year's presentation.
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
39
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). This statement establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. In 1999, Statement of Financial
Accounting Standards No. 137 was issued, which extends the effective date of FAS
133 to June 15, 2000. Based on current activities, this standard is not expected
to have a material impact on the Company's consolidated financial position, its
consolidated results of operations or its consolidated cash flows.
NOTE 2
FIXED ASSETS AND LEASE OBLIGATIONS
Fixed assets, which have estimated useful lives of up to 10 years, consisted of
the following:
-----------------------------------
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------
Equipment, leasehold
improvements and other
fixed assets $ 100,388,000 $ 97,357,000
- -------------------------------------------------------------------------------
Accumulated depreciation
and amortization (62,997,000) (55,209,000)
- -------------------------------------------------------------------------------
$ 37,391,000 $ 42,148,000
===============================================================================
At December 31, 1999, future minimum rentals for operating leases that had
initial or noncancelable lease terms in excess of one year were payable as
follows:
- -------------------------------------------------------------------------------
YEAR ENDED REQUIRED
DECEMBER 31, MINIMUM PAYMENT
- -------------------------------------------------------------------------------
2000 $24,557,000
- -------------------------------------------------------------------------------
2001 $20,994,000
- -------------------------------------------------------------------------------
2002 $18,198,000
- -------------------------------------------------------------------------------
2003 $14,224,000
- -------------------------------------------------------------------------------
2004 $10,309,000
- -------------------------------------------------------------------------------
Thereafter $20,523,000
- -------------------------------------------------------------------------------
Rent expense for 1999, 1998, and 1997 approximated $24,070,000, $23,735,000, and
$24,475,000, respectively.
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
$750,000,000 through April 29, 2003. Any principal amount of borrowings
outstanding under the Credit Agreement will be due and payable at that date. At
December 31, 1999, an annual commitment fee of .375% was payable on the daily
average unused portion of the Credit Agreement. Interest rates available for
amounts outstanding under this arrangement are currently: prime, 1.875% over
30-day LIBOR or a money market bid option. At December 31, 1999 and 1998, the
Company had borrowings outstanding under the Credit Agreement of $297,000,000
and $287,000,000, respectively. The effective interest rate on the outstanding
borrowings at December 31, 1999 was 8.4%.
The Company has $150,000,000 in Senior Notes outstanding with a group of
institutional investors that mature in accordance with a scheduled payment plan
calling for equal annual payments beginning August 25, 2000 and ending August
25, 2005. The Senior Notes bear interest at a fixed rate of 8.92%. The Company
intends to finance the Senior Notes that become due by utilizing the Credit
Agreement. As such, $25,000,000 due in 2000 has been included in the payments
due in 2003, the year the Credit Agreement expires.
The Company has issued an aggregate of $250,000,000 in additional Senior Notes
with institutional investors. Principal payments on these Senior Notes are due
over periods beginning in July 2002 and ending in July 2008, and bear interest
at fixed rates ranging from 8.52% to 8.72%.
Under the terms of the Credit Agreement and both Senior Notes, the Company is
required to meet certain financial covenants, including maintaining certain cash
flow and debt ratios. Borrowings under these credit facilities are secured by
the stock of the Company's subsidiaries.
<PAGE>
40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, the Company was a party to an interest-rate protection
agreement entered into with a member of the Company's banking group, which
extends up to two years and limits interest rates to 8.4%. The notional
principal amount of debt covered by this arrangement over its remaining life
ranges from $100,000,000 to $175,000,000. At December 31, 1999 and 1998,
unamortized premiums were not significant. Amortization of premiums, which is
included in interest expense, was $78,000, $541,000, and $960,000 for the years
ended December 31, 1999, 1998, and 1997, 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 regular basis.
At December 31, 1999 and 1998, the Company also had $181,737,000 and
$202,840,000, 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, 1999, have interest rates ranging from 5.5%
to 7.5%. The notes outstanding may be tendered upon the exercise of warrants
issued in conjunction with the notes. In connection with the exercise of
warrants through the tender of subordinated notes, subordinated debt of
$16,240,000, $16,158,000, and $11,391,000 was extinguished in 1999, 1998, and
1997, respectively. In addition, $24,698,000 and $313,619,000 were paid in cash
during 1998 and 1997, respectively, primarily as a result of subordinated notes
maturing that were issued at the time of acquisition. During 1999, certain
principals of an affiliate of the Company assigned warrants, originally issued
as consideration for their acquisition, to an unaffiliated third party. The
Company subsequently received $3,510,000 in connection with the third party
tendering the warrants for UAM common stock. At the same time, UAM paid an equal
amount to the principals of the subsidiary to extinguish the subordinated note
that matured. The Company intends to finance subordinated debt that becomes due
which has not been tendered in connection with the exercise of warrants by
utilizing the Credit Agreement. As such, the $3,349,000 of subordinated notes
due in 2000 has been included in the payments due in 2003, the year the Credit
Agreement expires.
The aggregate cash repayments of all outstanding borrowings during the five
years after December 31, 1999 total the following amounts:
- --------------------------------------------------------------------------------
YEAR ENDED REQUIRED
DECEMBER 31, MINIMUM PAYMENT
- --------------------------------------------------------------------------------
2000 --
- --------------------------------------------------------------------------------
2001 $113,901,000
- --------------------------------------------------------------------------------
2002 $ 86,901,000
- --------------------------------------------------------------------------------
2003 $365,723,000
- --------------------------------------------------------------------------------
2004 $ 68,964,000
- --------------------------------------------------------------------------------
The recorded cost of the Senior Notes approximates fair value. Due to the unique
nature of each of the subordinated debt instruments issued to the sellers of
firms, the assessment of current fair value is not practicable.
Accrued interest of $21,148,000 and $19,898,000 was included in accounts payable
and accrued expenses at December 31, 1999 and 1998, respectively. Interest
expense and interest paid for each of the three years ended December 31 were as
follows:
-------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest
expense $70,067,000 $60,275,000 $43,156,000
- --------------------------------------------------------------------------------
Interest
paid $68,739,000 $51,817,000 $47,156,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
41
NOTE 4
STOCKHOLDERS' EQUITY
In 1999 and 1998, the Company issued 50,000 and 529,680 shares of common stock,
respectively, in connection with additional purchase price commitments related
to a prior-year acquisition. Also during 1998, the Company issued 239,320 shares
of common stock in connection with an acquisition of an equity interest.
The Company issued 167,100 and 1,097,566 warrants during 1998 and 1997,
respectively, to effect acquisitions accounted for as purchases.
The Company has a program to repurchase shares of its common stock to meet the
requirements for future issuance of shares upon the exercise of stock options
and warrants. Total shares of 31,173,734 have been repurchased at a cost of
$637,098,000. As of December 31, 1999, all but 13,173,451 shares had been
reissued from treasury upon the exercise of stock options and warrants. During
1999, the Company's directors increased the number of shares authorized for
repurchase from 32,000,000 as of December 31, 1998 to a total of 40,000,000
shares as of December 31 1999.
Included in accounts payable and accrued expenses at December 31, 1999 and 1998
were dividends payable of $11,459,000 and $12,311,000, respectively.
At December 31, 1999, the following warrants were outstanding at a weighted
average exercise price of $24.47 per share:
- --------------------------------------------------------------------------------
YEAR OF SHARES RANGE OF
EXPIRATION ISSUABLE EXERCISE PRICES
- --------------------------------------------------------------------------------
2000 127,950 $14.50-16.50
- --------------------------------------------------------------------------------
2001 3,641,178 $14.50-28.75
- --------------------------------------------------------------------------------
2002 2,205,311 $19.50-28.75
- --------------------------------------------------------------------------------
2003 59,565 $23.00
- --------------------------------------------------------------------------------
2004 1,097,566 $23.00-34.00
- --------------------------------------------------------------------------------
2005 167,100 $22.66
- --------------------------------------------------------------------------------
7,298,670
================================================================================
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, 1999.
NOTE 5
STOCK OPTION PLANS
Under the Company's Amended and Restated 1994 Stock Option Plan, the Board of
Directors is authorized to grant options for the purchase of 11,900,000 shares
of the Company's common stock to directors, officers and other key employees of
the Company and its subsidiaries. The exercise price of the options granted to
officers and other key employees is not less than the fair market value of the
Company's common stock at the date of the grant. These options expire five years
from the date of the grant and may not be exercised for one year from the date
of the grant. Thereafter, they may be exercised ratably over the ensuing four
years.
Each eligible director is granted 14,000 options annually for the purchase of
shares of the Company's common stock at the fair market value at the date of the
grant. Eligible directors may also elect to receive discounted options in lieu
of a portion of their directors' fees. All options granted to directors expire
five years from the date of the grant and generally may not be exercised for six
months from the date of the grant. In 1999, 98,000 options were granted under
the annual provision and 15,134 discounted options were issued in lieu of
directors' fees. The Company applies APB 25 in accounting for its stock option
plans. Had compensation cost for the Company's plans been determined based on
the fair value of the awards at the grant dates, consistent with the methodology
prescribed by FAS 123, the Company's net income (loss) and earnings (loss) per
share, including tax effects if any, would have been as follows:
--------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net income (loss) $54,636,000 $71,580,000 $(9,277,000)
- --------------------------------------------------------------------------------
Basic earnings (loss)
per share $.92 $1.08 $(.13)
- --------------------------------------------------------------------------------
Diluted earnings (loss)
per share $.92 $1.05 $(.13)
- --------------------------------------------------------------------------------
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 1999, 1998, and 1997, respectively:
expected life of 4.7, 4.5, and 4.5 years; stock price volatility of 24.8, 22.5,
and 22.1 percent; risk-free interest rates of 5.2, 5.3, and 6.3 percent; and
dividend yield of 3.8, 3.4, and 2.6 percent. The weighted-average fair value of
options granted during 1999, 1998, and 1997 was $4.23, $4.46, and $6.08,
respectively.
<PAGE>
42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the Company's stock option plans as of December 31, 1999, 1998, and
1997, and changes during the years ending on those dates is presented below:
------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE EXERCISABLE EXERCISE
PRICE PRICE
- --------------------------------------------------------------------------------
Balance,
December 31, 1996 7,018,196 $16.83 3,015,657 $13.83
- --------------------------------------------------------------------------------
Options granted 2,047,125 $26.90
- --------------------------------------------------------------------------------
Options exercised (2,102,764) $11.86
- --------------------------------------------------------------------------------
Options canceled (203,446) $21.19
- --------------------------------------------------------------------------------
Balance,
December 31, 1997 6,759,111 $21.29 2,558,059 $18.79
- --------------------------------------------------------------------------------
Options granted 3,519,027 $23.42
- --------------------------------------------------------------------------------
Options exercised (1,345,494) $17.80
- --------------------------------------------------------------------------------
Options canceled (1,018,793) $23.66
- --------------------------------------------------------------------------------
Balance,
December 31, 1998 7,913,851 $22.53 2,823,398 $20.83
- --------------------------------------------------------------------------------
Options granted 2,152,639 $21.29
- --------------------------------------------------------------------------------
Options exercised (1,000,604) $18.55
- --------------------------------------------------------------------------------
Options canceled (566,256) $23.09
- --------------------------------------------------------------------------------
Balance,
December 31, 1999 8,499,630 $22.64 3,404,824 $22.37
================================================================================
At December 31, 1999, the Company had 2,050,186 options available for future
grants. Shares reserved but unissued at December 31, 1999 and 1998 were
10,549,816 and 11,583,070, respectively.
The following table summarizes information about all stock options outstanding
at December 31, 1999:
------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------
YEAR OF RANGE NUMBER OF WEIGHTED NUMBER OF WEIGHTED
EXPIRATION OF OPTIONS AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING EXERCISE EXERCISABLE EXERCISE
PRICE PRICE PRICE
- --------------------------------------------------------------------------------
2000 $13.36-19.94 946,709 $19.11 939,081 $19.05
- --------------------------------------------------------------------------------
2001 $18.19-26.75 1,086,117 $20.60 847,803 $20.59
- --------------------------------------------------------------------------------
2002 $21.09-29.50 1,443,181 $27.04 789,643 $27.11
- --------------------------------------------------------------------------------
2003 $18.56-27.19 2,992,371 $23.37 812,574 $23.51
- --------------------------------------------------------------------------------
2004 $16.55-24.38 2,031,252 $21.19 15,723 $19.26
- --------------------------------------------------------------------------------
$13.36-29.50 8,499,630 $22.64 3,404,824 $22.37
================================================================================
NOTE 6
INCOME TAXES
Income taxes for financial reporting purposes are recorded in accordance with an
asset and liability approach that requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of the Company's assets
and liabilities.
Income (loss) before income tax expense (benefit) was taxed under the following
jurisdictions:
-----------------------------------------------------------
YEAR 1999 1998 1997
ENDED
DEC. 31,
- --------------------------------------------------------------------------------
Domestic $100,173,000 $118,135,000 $(27,290,000)
- --------------------------------------------------------------------------------
Foreign 6,981,000 19,114,000 20,067,000
- --------------------------------------------------------------------------------
$107,154,000 $137,249,000 $ (7,223,000)
================================================================================
Income tax expense (benefit) consisted of the following:
-----------------------------------------------------------
YEAR 1999 1998 1997
ENDED
DEC. 31,
- --------------------------------------------------------------------------------
Current:
- --------------------------------------------------------------------------------
Federal $32,722,000 $41,462,000 $54,910,000
- --------------------------------------------------------------------------------
State 6,317,000 8,485,000 8,797,000
- --------------------------------------------------------------------------------
Foreign 3,264,000 6,737,000 5,527,000
- --------------------------------------------------------------------------------
Deferred:
- --------------------------------------------------------------------------------
Federal 10,184,000 2,615,000 (58,131,000)
- --------------------------------------------------------------------------------
State (5,059,000) 2,080,000 (13,693,000)
- --------------------------------------------------------------------------------
Foreign (1,561,000) (2,637,000) (500,000)
- --------------------------------------------------------------------------------
$45,867,000 $58,742,000 $(3,090,000)
================================================================================
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
43
Deferred income taxes consisted of the following:
--------------------------------
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets:
- -------------------------------------------------------------------------------
Deferred incentive
compensation $ 3,893,000 $ 6,167,000
- -------------------------------------------------------------------------------
Additional contract
amortization for book
purposes 51,835,000 55,071,000
- -------------------------------------------------------------------------------
State net operating
loss carryforwards 10,749,000 7,495,000
- -------------------------------------------------------------------------------
Foreign tax credit
carryforwards 5,409,000 6,749,000
- -------------------------------------------------------------------------------
Total gross deferred
tax assets 71,886,000 75,482,000
- -------------------------------------------------------------------------------
Deferred tax assets
valuation allowance (6,804,000) (7,602,000)
- -------------------------------------------------------------------------------
65,082,000 67,880,000
- -------------------------------------------------------------------------------
Deferred tax liabilities:
- -------------------------------------------------------------------------------
Additional contract
amortization
for tax purposes 44,109,000 51,377,000
- -------------------------------------------------------------------------------
Contracts acquired in
nontaxable transactions 33,259,000 34,992,000
- -------------------------------------------------------------------------------
Other 19,597,000 9,036,000
- -------------------------------------------------------------------------------
96,965,000 95,405,000
- -------------------------------------------------------------------------------
Net deferred tax liability $ 31,883,000 $ 27,525,000
===============================================================================
A component of the Company's deferred tax asset consists of the future tax
benefits from domestic net operating loss carryforwards and foreign tax credits.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires that a valuation allowance be recorded against deferred tax
assets for which it is believed that it is more likely than not that all or a
portion of the benefits of the carryforward losses and tax credits will not be
realized. In establishing a valuation reserve, management considers such factors
as earnings in recent years and the scheduled expiration of the net operating
loss carryforwards and tax credits. During 1999, the Company decreased its
deferred tax valuation allowance by $798,000, to a total of $6,804,000 as of
December 31, 1999.
At December 31, 1999, the Company had state net operating loss carryforwards of
approximately $124,697,000, which will begin to expire in 2000. Also, at
December 31, 1999, the Company had approximately $5,409,000 of foreign tax
credit carryforwards of which $1,324,000, $1,432,000, $981,000, $381,000, and
$1,291,000 expire in 2000, 2001, 2002, 2003, and 2004, respectively.
The effective income tax rate differed from the statutory federal income tax
rate as follows:
-----------------------------------------
YEAR ENDED 1999 1998 1997
DECEMBER 31,
- --------------------------------------------------------------------------------
Federal income tax
statutory rate 35% 35% (35)%
- --------------------------------------------------------------------------------
State income taxes,
net of federal benefit 3 4 (15)
- --------------------------------------------------------------------------------
Foreign income taxes 1 -- (11)
- --------------------------------------------------------------------------------
Nondeductible items
and other 4 4 18
- --------------------------------------------------------------------------------
43% 43% (43)%
================================================================================
Excluding the effect of the 1997 charge reducing the value of intangible assets,
the percentages presented above for 1997 would have been similar to those
reported for 1999 and 1998. Income taxes of approximately $44,700,000,
$48,500,000, and $76,800,000 were paid in 1999, 1998, and 1997, respectively.
For purchase acquisitions that 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 that 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.
<PAGE>
44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
NOTE 7
SEGMENT INFORMATION
The Company operates in one business segment, that is, as investment advisers,
managing both domestic and international investment portfolios for corporate,
government and union benefit plans, mutual funds, individuals, endowments, and
foundations. Although each affiliated firm operates under its own name with its
own investment philosophy and approach, the firms' regulatory environments and
the economic characteristics of their products, services, client bases and
manner of distribution are similar. Therefore, the affiliated firms are
aggregated as one business segment.
Revenues and long-lived assets shown below are classified according to the
affiliate's geographic location. The majority of the foreign long-lived assets
are domiciled in Canada. These Canadian assets totaled $140,068,000,
$145,777,000, and $116,939,000 at December 31, 1999, 1998, and 1997,
respectively. Revenues are derived primarily from fees for investment advisory
services provided to institutional and other clients. These fees are generally a
function of the overall fee rate charged to each account and the level of assets
under management by the affiliated firms.
-----------------------------------------------------------
YEAR 1999 1998 1997
ENDED
DEC. 31,
- --------------------------------------------------------------------------------
Domestic
revenues $802,201,000 $869,706,000 $ 864,957,000
- --------------------------------------------------------------------------------
Foreign
revenues $80,105,000 $92,148,000 $ 76,664,000
- --------------------------------------------------------------------------------
Domestic
long-lived
assets $859,655,000 $941,116,000 $1,015,714,000
- --------------------------------------------------------------------------------
Foreign
long-lived
assets $157,095,000 $163,299,000 $ 131,364,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
45
NOTE 8
ACQUISITIONS, COMMITMENTS
AND OTHER
During 1999, the Company closed UAM Retirement Plan Services, Inc. and sold
Nelson, Benson and Zellmer, Inc., an affiliate of the Company, to its
principals.
During 1998, the Company acquired an interest in Integra Capital Management
Company, provided financing for Pell, Rudman & Co., Inc. to acquire Sovereign
Financial Services, Inc., and sold Analytic(bullet)TSA International, Inc. In
addition, Heitman Financial LLC, an affiliate of the Company, sold its
non-retail property management operations.
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.
The Company's results of operations reflect the activity described above as of
the respective transaction dates. These transactions did not have a material
effect on the Company's consolidated results of operations, either individually
or in the aggregate.
The purchase price, including direct costs, associated with the acquisitions
accounted for as purchases and the allocations thereof are summarized as
follows:
--------------------------------------------
YEAR ENDED 1999 1998 1997
DECEMBER 31,
- --------------------------------------------------------------------------------
Consideration:
- --------------------------------------------------------------------------------
Cash -- $32,923,000 $160,167,000
- --------------------------------------------------------------------------------
Notes payable -- -- 105,176,000
- --------------------------------------------------------------------------------
Common stock
and warrants -- 7,016,000 1,294,000
- --------------------------------------------------------------------------------
-- $39,939,000 $266,637,000
================================================================================
Allocation
of purchase price:
- --------------------------------------------------------------------------------
Net tangible assets -- $ 708,000 $ 1,562,000
- --------------------------------------------------------------------------------
Cost assigned to
contracts acquired -- 18,209,000 258,492,000
- --------------------------------------------------------------------------------
Other assets -- 21,022,000 6,583,000
- --------------------------------------------------------------------------------
-- $39,939,000 $266,637,000
================================================================================
At December 31, 1999, $3,401,000 was accrued in senior notes payable and
capitalized to cost assigned to contracts acquired in connection with additional
purchase price commitments payable in 2000 and 2001 to the former owners of
three affiliates.
At December 31, 1998, $521,000 was accrued in senior notes payable and
capitalized to cost assigned to contracts acquired in connection with an
additional purchase price commitment that was payable in 1999 to the former
owner of an affiliate.
At December 31, 1997, a total of $79,098,000 was accrued in senior notes payable
and subordinated notes payable and capitalized to cost assigned to contracts
acquired in connection with additional purchase price commitments that were
payable in 1998 to the former owners of two affiliates. The actual contingent
payments totaled $82,492,000, and during the first quarter of 1998, 81% of this
amount was paid in cash, 15% was issued in the Company's common stock, and 4%
was issued as subordinated notes.
In conjunction with certain acquisitions, employment arrangements and incentive
plans, the Company is contingently liable to make payments totaling as much as
$154,000,000 related to acquisitions and employment agreements, and $15,000,000
related to incentive plans. These payments may be in the form of cash and
subordinated notes on dates through 2007 and depend on the achievement and
maintenance of stipulated performance measures.
<PAGE>
46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of United Asset Management
Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of United Asset Management Corporation and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 2000
- --------------------------------------------------------------------------------
UNITED ASSET MANAGEMENT CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
COMMON STOCK The Company's common stock is listed on the New York Stock
INFORMATION Exchange (ticker symbol: UAM). Presented below are the high,
low and closing quarterly stock prices for 1998 and 1999, as
reported on the New York Stock Exchange composite tape,
together with quarterly dividends declared.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 High $29 5/8 $27 7/16 $29 1/16 $26 1/8
-----------------------------------------------------------------------------------------------------
Low $21 3/16 $24 7/8 $20 1/16 $20 3/8
-----------------------------------------------------------------------------------------------------
Close $27 1/4 $26 1/16 $21 1/2 $26
-----------------------------------------------------------------------------------------------------
Dividend declared $.20 $.20 $.20 $.20
-----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
1999 High $25 3/16 $24 3/8 $22 3/4 $21 11/16
-----------------------------------------------------------------------------------------------------
Low $21 5/16 $20 7/8 $17 5/8 $17 3/4
-----------------------------------------------------------------------------------------------------
Close $22 5/8 $22 3/4 $19 1/4 $18 9/16
-----------------------------------------------------------------------------------------------------
Dividend declared $.20 $.20 $.20 $.20
-----------------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------
SELECTED QUARTERLY FIRST SECOND THIRD FOURTH
FINANCIAL DATA QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Revenues $ 241,820 $ 254,376 $226,745 $ 238,913
-----------------------------------------------------------------------------------------------------
Operating income $ 50,370 $ 52,046 $ 47,155 $ 44,924
-----------------------------------------------------------------------------------------------------
Income before
income tax expense $ 38,635 $ 38,665 $ 31,034 $ 28,915
-----------------------------------------------------------------------------------------------------
Net income $ 22,098 $ 22,117 $ 17,753 $ 16,539
-----------------------------------------------------------------------------------------------------
Basic earnings per share(1) $.32 $.33 $.27 $.26
-----------------------------------------------------------------------------------------------------
Diluted earnings per share(1) $.31 $.32 $.27 $.26
-----------------------------------------------------------------------------------------------------
Cash Earnings(2) $ 53,642 $ 57,159 $ 51,243 $ 49,360
-----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
1999 Revenues $ 217,695 $ 219,342 $217,215 $ 228,054
-----------------------------------------------------------------------------------------------------
Operating income $ 43,392 $ 43,733 $ 44,894 $ 44,297
-----------------------------------------------------------------------------------------------------
Income before
income tax expense $ 26,399 $ 26,047 $ 27,548 $ 27,160
-----------------------------------------------------------------------------------------------------
Net income $ 15,101 $ 14,901 $ 15,754 $ 15,531
-----------------------------------------------------------------------------------------------------
Basic earnings per share(1) $.25 $.25 $.27 $.27
-----------------------------------------------------------------------------------------------------
Diluted earnings per share(1) $.25 $.25 $.27 $.27
-----------------------------------------------------------------------------------------------------
Cash Earnings(2) $ 46,775 $ 47,499 $ 47,409 $ 48,189
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Under generally accepted accounting principles, when earnings per share
are computed under the treasury stock method, the total of four quarters'
earnings per share may not equal the earnings per share for the year.
(2) Net income plus amortization and depreciation, previously referred to as
"Operating Cash Flow."
<TABLE>
<CAPTION>
UNITED ASSET MANAGEMENT CORPORATION Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Financial
Affiliated Firm Organization Statements
- --------------- ------------ ----------
<S> <C> <C>
Acadian Asset Management, Inc. Massachusetts Consolidated
Analytic Investors, Inc. California Consolidated
Barrow, Hanley, Mewhinney & Strauss, Inc. Nevada Consolidated
Cambiar Investors, Inc. Colorado Consolidated
The Campbell Group, LLC (1) 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 LLC Delaware Consolidated
Heitman Financial Services LLC Illinois Consolidated
Heitman Capital Management LLC Illinois Consolidated
Hellman, Jordan Management Company, Inc. Delaware Consolidated
Integra Capital Financial Corporation Ontario Consolidated
Integra Capital Management Corporation Ontario Consolidated
InvestLink Technologies, Inc. New Jersey Consolidated
Investment Counselors of Maryland, Inc. Maryland Consolidated
Investment Research Company Illinois Consolidated
Jacobs Asset Management Delaware Consolidated
Tom Johnson Investment Management, Inc. Massachusetts Consolidated
L&B Realty Advisors, Inc. Delaware Consolidated
L&B Institutional Property Managers, Inc. (2) Delaware Consolidated
Lincluden Management Limited Ontario Consolidated
C. S. McKee & Company, Inc. Pennsylvania Consolidated
Murray Johnstone Limited Scotland 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, 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 Shareholder Service Center, Inc. Delaware Consolidated
UAM Trust Company Maryland Consolidated
UAM (Japan) Inc. Delaware Consolidated
UAM Investment Trust Management Co., Ltd. (Japan) Japan Consolidated
</TABLE>
(1) As of February 1, 2000, The Campbell Group, Inc. changed its name to The
Campbell Group, LLC.
(2) L&B Institutional Property Managers, Inc. has seven property management
subsidiaries operating in the U.S.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference 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 2, 2000 relating to the financial statements, which appears in the
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report dated
February 2, 2000 relating to the Financial Statement Schedule, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 21, 2000
Exhibit 99.1
RISK FACTORS
UAM's management may make "forward-looking" statements in the Form 10-K to
which this document is filed as an exhibit, in other documents filed with the
SEC (including those documents incorporated by reference into the Form 10-K), in
press releases, and in discussions with analysts, investors and others. These
statements include:
o descriptions of UAM's operational plans,
o expectations about future earnings and other results of operations,
o views of future industry or market conditions, and
o other statements that include words like "may," "expects,"
"believes," and "intends," and that describe opinions about future
events.
Investors should not rely on these statements as though they were
guarantees. These statements are current only when they are made. UAM's
management has no obligation to revise or update these statements based on
future developments. Known and unknown risks may cause UAM's actual results and
performances to be materially different from those expressed or implied by these
statements. Some of these risks are identified and explained below.
MOST OF UAM'S REVENUES ARE BASED ON THE MARKET VALUE OF MANAGED ASSETS AND,
THEREFORE, WILL RISE AND FALL WITH CHANGES IN THE ECONOMY AND FINANCIAL MARKETS
Most of the revenues of UAM's affiliated firms are investment advisory
fees, which are based primarily on the market value of assets under management.
Consequently, UAM's financial results depend directly on changes in the economy
and financial markets. These changes can be extremely volatile and are difficult
to predict.
However, changes in the financial markets may also have an inverse effect
on assets under management. First, when prices in financial markets rise, U.S.
employers may make net withdrawals from their defined benefit plans. The
Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal
Revenue Code of 1986 (the "Tax Code") require employers to fund their plans
sufficiently to generate the benefits they have promised, based on actuarial
calculations. However, the Tax Code also discourages employers from overfunding
these plans by limiting tax deductions for contributions to fully funded plans.
UAM believes that the high investment returns experienced in the 1980s and 1990s
have caused many defined benefit plans to reach or exceed their full funding
limits. Therefore, many employers may have ceased to
<PAGE>
contribute additional cash to these plans, even though these employers may be
withdrawing assets from the plans to pay benefits as they become due.
Second, many investors wish to maintain a particular balance in their
portfolios among various asset classes and investment styles. Over time, if
funds allocated to one asset class outperform the rest of the portfolio, the
portfolio may become overweighted in that asset class. If the investor has not
changed its optimal asset allocation, the investor may rebalance the portfolio
by withdrawing funds from the asset class that outperformed and redistributing
those funds among the other asset classes and styles in the portfolio. In this
way, an advisor that manages in one particular asset class or style may
experience negative client cash flows after relative performance was positive,
and positive client cash flows after relative performance was negative.
THE INVESTMENT MANAGEMENT BUSINESS IS HIGHLY COMPETITIVE
UAM's affiliated firms compete to manage domestic and international
investment portfolios for corporate benefit plans, mutual funds, government and
union benefit plans, individuals, endowments, and foundations. UAM believes that
the most important factors affecting competition in the investment management
industry are:
o the abilities and reputations of investment managers,
o stability of a firm's workforce, especially of portfolio managers,
o an effective marketing force with broad access to channels of
distribution,
o differences in the investment performance of investment management
firms,
o adherence to particular investment styles,
o quality of client service,
o the development of new investment strategies,
o resources to invest in information technologies, and
o public recognition of trade names in retail markets
UAM's affiliated firms face many competitors, including public and private
investment advisers, as well as affiliates of securities broker-dealers,
commercial banks, investment banks, and insurance companies. Barriers to entry
are low, and firms in the investment management business are relatively
long-lived.
Institutional clients typically may terminate investment management
contracts without penalty upon 30-days' notice. Mutual funds typically may
terminate investment management contracts without penalty upon 60-days' notice,
and retail clients may redeem investments in mutual funds at any time.
THE INVESTMENT MANAGEMENT BUSINESS IS SUSCEPTIBLE TO INTERNAL SHIFTS AND
FREQUENTLY REQUIRES FIRMS TO ADAPT
<PAGE>
Firms typically position themselves to provide investment management
services within certain asset classes (equities, debt, real estate, etc.) and
investment styles (value, growth, sector rotation, etc.). Periodic shifts in the
investment management industry may favor firms with strength in particular areas
and firms that have the ability to adjust to these shifts.
For example, the implementation of the European Monetary Union includes
the elimination of the national currencies and the coordination of economic
policy of the 11 member countries. These developments may cause several shifts
in the industry including:
o The preferred basis for equity asset allocation may shift from
regional and country selection to industry selection;
o Investors in member countries may be more willing to invest in
equity and debt securities from other member countries since there
will no longer be exchange rate risk; and
o Investors may no longer require certain hedging techniques that seek
to reduce exchange rate risk.
As another example, 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.
UAM'S AFFILIATED FIRMS DEPEND SIGNIFICANTLY ON KEY EMPLOYEES
Individual investment managers at UAM's affiliated firms often have
regular direct contact with clients, which may cause the clients to base their
relationships largely on trust in that individual manager. Some clients could
withdraw assets if an affiliated firm loses a key investment manager. UAM's
success depends on its ability to attract, retain, and motivate sufficient
numbers of qualified managers at its affiliated firms.
In most cases, key managers have signed long-term employment contracts and
have agreed not to provide investment advisory services to any of their firm's
clients for a period after their employment ends. UAM depends on the
enforceability of these employment and non-competition agreements. Also, UAM
uses a combination of short-term and long-term financial incentives to help its
firms retain these individuals. However, these methods do not guarantee that
these individuals will remain with UAM's firms for the specified term of the
agreements or for any further term. The market for investment managers is
extremely competitive. Increasingly, in the industry, investment managers are
moving among different firms and starting new firms.
UAM'S REPORTED NET EARNINGS MAY BE AFFECTED BY CHANGES IN ITS AMORTIZATION OF
CLIENT CONTRACTS
<PAGE>
When UAM acquires an investment advisory firm in a purchase business
transaction, UAM's balance sheet gains a new intangible asset - the cost
assigned to investment advisory contracts acquired. UAM amortizes this amount on
a straight-line basis over the estimated weighted average useful life of the
contracts. Determinations of these estimates consider historical patterns of
terminations by clients and the size and age of the contracts. If actual client
terminations occur significantly sooner than originally estimated or in certain
other circumstances, generally accepted accounting principles require that UAM
amortize the remaining asset over the revised estimated (shorter) life. This
acceleration of amortization further lowers UAM's reported net earnings during
the revised estimated life of the contracts.
In addition, UAM regularly analyzes the value of investment advisory
contracts. Many factors can affect the value of these contracts, including
changes in advisory fee rates, strategic planning at the affiliated firm,
realignment of client and consultant relationships, and performance in managing
assets. In its analysis, UAM compares the carrying value of the contracts
against the estimated undiscounted future cash flows associated with the
contracts. If the undiscounted future cash flows are not sufficient to recover
the carrying value of the asset, accounting principles require that UAM adjust
the carrying cost of the contracts to their estimated fair value. Such an
adjustment, known to accountants as an "impairment" charge, would lower UAM's
reported net earnings. The press release attached as Exhibit 99.1 to UAM's Form
8-K filed on January 22, 1998, describes a charge in the fourth quarter of
fiscal year 1997 resulting from the impairment of client contracts at two of
UAM's affiliated firms.
THE IRS IS SEEKING ADJUSTMENTS TO SEVERAL OF UAM'S FEDERAL INCOME TAX RETURNS
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, 1999,
describe UAM's method for amortizing investment advisory contracts for tax
purposes in years prior to 1993 and the method permitted by the Revenue
Reconciliation Act of 1993 (the "93 Act") for subsequent years. The Internal
Revenue Service ("IRS") has audited UAM's federal income tax returns for 1984
through 1992 and is challenging UAM's amortization prior to the 93 Act. The
Notes address this audit and the IRS's position in more detail. UAM believes
that it will prevail in the audit. However, if the IRS prevails in all aspects
of this audit, for the years prior to 1993 UAM would owe approximately
$56,000,000, plus interest, in additional tax.
UAM DELEGATES AUTHORITY TO MAKE DECISIONS OVER THE OPERATIONS OF ITS AFFILIATED
FIRMS
As sole or principal stockholder, UAM has the power to elect and remove
directors of its affiliated firms and to veto any major actions that the firm
may take. However, UAM authorizes the principals of the affiliated firms to
manage their own day-to-day operations, including employee matters, investment
management policies and fee structures, product development, marketing, client
relationships, compensation programs, and compliance activities. Indeed, UAM
<PAGE>
itself is not registered as an investment adviser either with the SEC 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, UAM's approach limits its ability to alter or
coordinate the investment management practices and policies of its affiliated
firms.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S YEAR ENDED DECEMBER 31, 1999 CONSOLIDATED STATEMENT OF
OPERATIONS (SEE ANNUAL REPORT PAGE 33) AND THE CONSOLIDATED BALANCE SHEET (SEE
ANNUAL REPORT PAGE 32). THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000796370
<NAME> United Asset Management Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 123,754
<SECURITIES> 0
<RECEIVABLES> 169,566
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 304,941
<PP&E> 100,388
<DEPRECIATION> (62,997)
<TOTAL-ASSETS> 1,321,691<F1>
<CURRENT-LIABILITIES> 222,550
<BONDS> 882,138<F2>
0
0
<COMMON> 703
<OTHER-SE> 184,417
<TOTAL-LIABILITY-AND-EQUITY> 1,321,691
<SALES> 0
<TOTAL-REVENUES> 882,306
<CGS> 0
<TOTAL-COSTS> 600,502
<OTHER-EXPENSES> 105,488<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,162
<INCOME-PRETAX> 107,154
<INCOME-TAX> 45,867
<INCOME-CONTINUING> 61,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,287
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.03
<FN>
<F1>
Includes $841,454 of cost assigned to contracts acquired, net.
<F2>
Includes $700,401 in senior notes payable and $181,737 in subordinated notes
payable.
<F3>
Represents amortization of cost assigned to contracts acquired.
</FN>
</TABLE>
