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<SEC-DOCUMENT>0001047469-98-012966.txt : 19980401
<SEC-HEADER>0001047469-98-012966.hdr.sgml : 19980401
ACCESSION NUMBER: 0001047469-98-012966
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980331
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AFFILIATED MANAGERS GROUP INC
CENTRAL INDEX KEY: 0001004434
STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282]
IRS NUMBER: 043218510
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-13459
FILM NUMBER: 98582400
BUSINESS ADDRESS:
STREET 1: TWO INTERNATIONAL PLACE
STREET 2: 23RD FL
CITY: BOSTON
STATE: MA
ZIP: 02110
BUSINESS PHONE: 6177473300
MAIL ADDRESS:
STREET 1: TWO INTERNATIONAL PL
STREET 2: 23RD FL
CITY: BOSTON
STATE: MA
ZIP: 02110
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K 405
<TEXT>
<PAGE>
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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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-13459
------------------------
AFFILIATED MANAGERS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 04-3218510
<S> <C>
(State or other jurisdiction or (IRS Employer Identification
incorporation or organization) Number)
</TABLE>
TWO INTERNATIONAL PLACE, BOSTON, MASSACHUSETTS, 02110
(Address of principal executive offices)
(617) 747-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock ($.01 par value) New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based upon the closing price of $37.125 on
March 13, 1998 on the New York Stock Exchange was $314,705,766. Calculation of
holdings by non-affiliates is based upon the assumption, for these purposes
only, that executive officers, directors, and persons holding 10% or more of the
Registrant's Common Stock (including the Registrant's Common Stock, $.01 par
value per share and the Registrant's Class B Non-Voting Common Stock, $.01 par
value per share, as if they were a single class) are affiliates. Number of
shares of the Registrant's Common Stock outstanding at March 13, 1998:
17,703,617 including 2,636,800 shares of Class B Non-Voting Common Stock. Unless
otherwise specified, the term Common Stock includes both Common Stock and Class
B Non-Voting Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this report on Form 10-K is
incorporated by reference to certain portions of the Proxy Statement of the
Registrant to be filed pursuant to Regulation 14A and sent to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1998.
Such Proxy Statement, except for the parts therein which have been specifically
incorporated herein by reference, shall not be deemed "filed" as part of this
report on Form 10-K.
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<PAGE>
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I................................................................................. 3
ITEM 1. BUSINESS..................................................................... 3
ITEM 2. PROPERTIES................................................................... 16
ITEM 3. LEGAL PROCEEDINGS............................................................ 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 16
PART II................................................................................ 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 17
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA........................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.................................................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................... 51
PART III............................................................................... 51
</TABLE>
INCORPORATED BY REFERENCE FROM THE COMPANY'S PROXY STATEMENT FOR
THE ANNUAL MEETING OF SHAREHOLDERS CURRENTLY SCHEDULED TO BE HELD
ON MAY 20, 1998, TO BE FILED PURSUANT TO REGULATION 14A
<TABLE>
<S> <C>
PART IV................................................................................ 52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.............. 52
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Affiliated Managers Group, Inc. ("AMG" or the "Company") is an asset
management holding company which acquires majority interests in mid-sized
investment management firms. The Company's strategy is to generate growth
through investments in new affiliates, as well as through the internal growth of
existing affiliated firms. With the completion of its investment in Essex
Investment Management Company, LLC ("Essex"), the Company's most recent
investment, AMG has grown since its founding in December 1993, to eleven
investment management firms (the "Affiliates") with approximately $50 billion in
assets under management.
AMG has developed an innovative transaction structure (the "AMG Structure"),
which it believes addresses the succession planning needs of growing mid-sized
investment management firms. The Company believes that the AMG Structure appeals
to target firms for both financial and operational reasons:
- The AMG Structure allows owners of mid-sized investment management firms
to sell a portion of their interest, while ongoing management retains a
significant ownership interest with the opportunity to realize value for
that interest in the future.
- The AMG Structure provides management owners of each Affiliate with
autonomy over the day-to-day operations of their firm, and includes a
revenue sharing arrangement which provides that a specified percentage of
revenues are retained to pay operating expenses at the discretion of the
Affiliate's management.
The Company believes that the AMG Structure distinguishes AMG from most
other acquirers of investment management firms which generally seek to own 100%
of their target firms and, in many cases, seek to participate in the day-to-day
management of such firms. AMG believes that the opportunity for managers of each
Affiliate to realize the value of their retained equity interest makes the AMG
Structure particularly appealing to managers of firms who anticipate strong
future growth and provides those managers with an ongoing incentive to continue
to grow their firm.
AMG's Affiliates manage assets across a diverse range of investment styles,
asset classes and client types, with significant participation in fast-growing
segments such as equities, global investments and mutual funds. On a pro forma
basis(1), for the year ended December 31, 1997, investments in equity securities
represented 84% of EBITDA Contribution(2), while global investments represented
38% of EBITDA Contribution. For the same period, mutual fund assets represented
31% of EBITDA Contribution on a pro forma basis. Other asset classes, including
fixed income, represented 16% of EBITDA Contribution; domestic investments
represented 62% of EBITDA Contribution; and institutional, high net worth and
other client types represented 69% of EBITDA Contribution for the same period
and on the same basis.
- ------------------------
(1) Throughout this document, the use of the term "pro forma" assumes that the
Company's investment in each Affiliate (other than Essex, in which the
Company invested on March 20, 1998) occurred on January 1, 1997.
(2) EBITDA Contribution represents the portion of an Affiliate's revenues that
is allocated to the Company, after amounts retained by the Affiliate for
compensation and day-to-day operating and overhead expenses, but before the
interest, tax, depreciation and amortization expenses of the Affiliate.
EBITDA Contribution does not include holding company expenses. The Company
believes that EBITDA Contribution may be useful to investors as an indicator
of each Affiliate's contribution to the Company's ability to service debt,
to make new investments and to meet working capital requirements. EBITDA
Contribution is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative
to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity. EBITDA Contribution and
EBITDA, as calculated by the Company, may not be consistent with comparable
computations by other companies.
3
<PAGE>
THE INDUSTRY
ASSETS UNDER MANAGEMENT
The investment management sector is one of the fastest growing sectors in
the financial services industry. According to U.S. Federal Reserve "Flow of
Funds Account" data, from 1992-1997, mutual fund assets under management
(excluding money market funds) grew at a compound annual growth rate of
approximately 21.9%, while the aggregate assets managed on behalf of pension
funds increased at a compound annual growth rate of approximately 12.1%. These
assets, which totaled over $9.5 trillion in 1997, represent only a portion of
the funds available for investment management. In addition, substantial assets
are managed on behalf of individuals in separate accounts, for foundations and
endowments, as a portion of certain insurance contracts such as variable annuity
plans and on behalf of corporations and other financial intermediaries. The
Company believes that demographic trends and the ongoing disintermediation of
bank deposits and life insurance reserves will result in continued growth of the
investment management industry.
INVESTMENT ADVISERS
The growth in industry assets under management has resulted in a significant
increase in the number of investment management firms within AMG's principal
targeted size range of $500 million to $10 billion of assets under management.
Within this size range, the Company has identified over 1,000 investment
management firms in the United States, and over 200 additional investment
management firms in Canada, the United Kingdom and in other European and Asian
countries. AMG believes that, in the coming years, a substantial number of
investment opportunities will arise as founders of such firms approach
retirement age and begin to plan for succession. The Company also anticipates
that there will be significant additional investment opportunities among firms
which are currently wholly-owned by larger entities. AMG believes that it is
well positioned to take advantage of these investment opportunities because it
has a management team with substantial industry experience and expertise in
structuring and negotiating transactions, as well as a highly organized process
for identifying and contacting investment prospects.
HOLDING COMPANY OPERATIONS
AMG's management performs two primary functions: (i) implementing the
Company's strategy of growth through acquisitions of interests in prospective
affiliates; and (ii) supporting, enhancing, and monitoring the activities of the
existing Affiliates.
ACQUISITION OF INTERESTS IN PROSPECTIVE AFFILIATES
The acquisition of interests in new affiliates is a primary element of AMG's
growth strategy. AMG's management is responsible for each step in the new
investment process, including identification and contact of potential
affiliates, and the valuation, structuring and negotiation of transactions. In
general, the Company seeks to initiate its contacts with potential affiliates on
an exclusive basis and does not actively seek to participate in competitive
auction processes or employ investment bankers or finders. The Company and the
AMG Structure have been competitive, however, in processes where investment
bankers are employed. Of the Company's eleven Affiliates, four were represented
by investment bankers while the remaining seven were transactions initiated by
AMG's management.
AMG's management identifies and develops relationships with promising
potential affiliates based on a thorough understanding of its principal target
universe, mid-sized investment management firms. Using its proprietary
database--comprised of data from third party vendors, public and industry
sources, and AMG research--AMG screens and prioritizes prospects within its
target universe. AMG also utilizes the database to monitor the level and
frequency of interaction with potential affiliates. AMG's database and contact
management system enhances the Company's ability to identify promising potential
affiliates and to develop and maintain relationships with these firms.
4
<PAGE>
AMG's management seeks to increase awareness of AMG's approach to investing
by sending periodic mailings to up to 5,000 individuals involved in the industry
and by participating in conferences and seminars related to succession planning
for investment management firms. Such activities lead to a number of unsolicited
calls to AMG by firms which are considering succession planning issues. In
addition, AMG's management maintains an active calling program in order to
develop relationships with prospective affiliates. The Company believes that it
has established ongoing relationships with a substantial number of firms which
will be considering succession planning alternatives in the future.
Once discussions with a target firm lead to transaction negotiations, AMG's
management team performs all of the functions related to the valuation,
structuring, and negotiation of the transaction. The Company's management team
includes professionals with substantial experience in mergers and acquisitions
of investment management firms.
Upon the negotiation and execution of definitive agreements, the firm
contacts its clients to notify them and seek their consent to the transaction
(which constitutes an assignment of the firm's investment advisory contracts) as
required by the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act") and, with respect to mutual fund clients, seeks new contracts (as
required by the Investment Company Act of 1940, as amended (the "1940 Act"))
through a proxy process.
During 1997 the Company invested in three affiliates: Gofen and Glossberg,
L.L.C., GeoCapital, LLC and Tweedy, Browne Company LLC. In addition, in March,
1998 the Company completed its investment in Essex.
GOFEN AND GLOSSBERG
Gofen and Glossberg, L.L.C. is an investment counseling firm which, as of
December 31, 1997, had $3.86 billion in assets under management. With its
predecessor having been founded in 1932, the firm has a long history of managing
assets for prominent individuals, families, retirement plans, foundations and
endowments. Based in Chicago, the firm is led by its President, William H.
Gofen, and its Executive Vice President, Joseph B. Glossberg.
GEOCAPITAL
GeoCapital, LLC invests in domestic small-capitalization growth and special
situation equities on behalf of corporations, retirement programs, foundations,
high net worth individuals and private partnerships. As of December 31, 1997,
GeoCapital, LLC had $2.39 billion in assets under management. With principal
offices in New York, the firm is led by its Chairman and Chief Investment
Officer, Irwin Lieber, and its President, Barry K. Fingerhut.
TWEEDY, BROWNE
Tweedy, Browne Company LLC is recognized as a leading practitioner of the
value-oriented investment approach first advocated by Benjamin Graham. Tweedy,
Browne Company LLC manages domestic, international and global equity portfolios
for institutions, individuals, partnerships, and mutual funds and, as of
December 31, 1997, had $5.34 billion in assets under management. The firm, which
is the successor to Tweedy & Co., a brokerage firm founded in 1920, is led by
Christopher H. Browne, William H. Browne and John D. Spears. Based in New York,
the firm also maintains a research office in London.
RECENT INVESTMENT: ESSEX
On March 20, 1998, the Company completed its investment (the "Essex
Investment") in Essex Investment Management Company, LLC. Essex is a
Boston-based manager which specializes in investing in growth equities, using a
fundamental research driven approach. As of December 31, 1997, Essex
5
<PAGE>
Investment Management Company, Inc. (Essex's predecessor) had $4.3 billion in
assets under management. Essex is led by its Chairman Joseph C. McNay, its
President Stephen D. Cutler and its Executive Vice President Stephen R. Clark.
In the Essex Investment, AMG paid $69.6 million in cash and the assumption of
debt and 1,750,942 shares of its Class C Convertible Non-Voting Stock, $.01 par
value per share (the "Class C Stock"), for an indirect 68.0% interest in the
Owner's Allocation (as defined below) of Essex. The Class C Stock is non-voting
stock and carries no preferences with respect to dividends or liquidation;
however, each share of Class C Stock converts into one share of Common Stock
upon the earlier of March 20, 1999 or certain extraordinary events.
AFFILIATE SUPPORT
In addition to its new investment efforts, AMG seeks to support and enhance
the growth and operations of its Affiliates. AMG believes that the management of
each Affiliate is in the best position to assess its firm's needs and
opportunities, and that the autonomy and culture of each Affiliate should be
preserved. However, when requested by Affiliate management, AMG provides
strategic, marketing, and operational assistance. The Company believes that
these support services are attractive to the Affiliates because such services
otherwise may not be as accessible or as affordable to mid-sized investment
management firms.
In addition to the diverse industry experience and knowledge of AMG's senior
management, AMG maintains relationships with numerous consultants whose specific
expertise enhances AMG's ability to offer a wide range of assistance. Specific
Affiliate support initiatives have included: new product development, marketing
material development, institutional sales assistance, recruiting, compensation
evaluation, regulatory compliance audits, and client satisfaction surveys. The
Company also endeavors to negotiate discounted pricing on products and services
useful to the operations of the Affiliates. For example, AMG has arranged
discounts on services such as sales training seminars, public relations
services, insurance, and retirement benefits.
AMG STRUCTURE AND RELATIONSHIP WITH AFFILIATES
As part of AMG's investment structure, each of the Affiliates is organized
as a separate and largely autonomous limited liability company or partnership.
Each Affiliate operates under its own limited liability company agreement or
partnership agreement (such Affiliate's "organizational document") which
includes provisions regarding the use of the Affiliate's revenues and the
management of the Affiliate. The organizational document of each Affiliate also
gives management owners the ability to realize the value of their retained
equity interests in the future. While the organizational document of each
Affiliate is agreed upon at the time of AMG's investment, from time to time
amendments are made to such organizational documents to accommodate business
needs of the Affiliate or AMG.
OPERATIONAL AUTONOMY OF AFFILIATES
The management provisions in each organizational document are jointly
developed by AMG and the Affiliate's senior management at the time AMG makes its
investment. These provisions, while varying among Affiliates, provide for
delegation to the Affiliate's management team of the power and authority to
carry on the day-to-day operation and management of the Affiliate, including
matters relating to personnel, investment management policies and fee
structures, product development, client relationships and employee compensation
programs. AMG does, however, retain the authority to prevent certain specified
types of actions which AMG believes could adversely affect cash distributions to
AMG. For example, none of the Affiliates may incur material indebtedness without
the consent of AMG. AMG itself does not manage investments for clients, does not
provide any investment management services and is not registered as an
investment adviser under federal or state law.
6
<PAGE>
REVENUE SHARING ARRANGEMENTS
AMG has a revenue sharing arrangement with each Affiliate which is contained
in the organizational document of that Affiliate. Each such arrangement
allocates a portion of revenues (typically 50-70%) for use by management of that
Affiliate in paying operating expenses of the Affiliate, including salaries and
bonuses (the "Operating Allocation"). The percentage of revenues included in
each Affiliate's Operating Allocation is determined by AMG and the managers of
the Affiliate at the time of AMG's investment, based on the Affiliate's
historical and projected operating margins. The remaining portion of revenues of
the Affiliate (typically 30-50%) is allocated to the owners of that Affiliate
(including AMG), generally in proportion to their ownership of the Affiliate.
AMG defines the portion of revenues that is allocated to the owners of each
Affiliate as the "Owners' Allocation" because it is the portion of both revenues
and cash flow which the Affiliate's management is prohibited from spending on
operating expenses (under the Affiliate's organizational document) without the
prior consent of AMG.
When AMG makes an investment in an Affiliate, the organizational document of
the Affiliate includes allocation provisions that divide the revenues of the
firm into the Owners' Allocation and the Operating Allocation. Before agreeing
to these allocations, AMG examines the revenue and expense base of the firm and
only agrees to a specific division of revenues if AMG believes that the
allocation to the Operating Allocation both (i) is sufficient to provide for the
payment of all operating expenses of the Affiliate, including salaries and
bonuses, and (ii) includes some Excess Operating Allocation (as defined below)
to provide a cushion against an increase in expenses or a decrease in revenues
which is not accompanied by a corresponding decrease in operating expenses.
While AMG and its management have significant experience in the asset management
industry, there can be no assurance that AMG will successfully anticipate
changes in the revenue and expense base of any firm and, therefore, there can be
no assurance that the agreed-upon allocation of revenues to the Operating
Allocation will be sufficient to pay for all operating expenses, including
salaries and bonuses of the Affiliate.
One of the purposes of the revenue sharing arrangements is to provide
ongoing incentives for the managers of the Affiliates. The revenue sharing
arrangements are designed to allow each Affiliate's managers to participate in
their firm's growth (through their compensation from the Operating Allocation
and their ownership of a portion of the Owners' Allocation) and to make
operating expenditures freely within the limits of the Operating Allocation. The
portion of the Operating Allocation that is not used to pay salaries and other
operating expenses (the "Excess Operating Allocation") is generally available to
be used at the discretion of management of the Affiliate, including for the
payment of bonuses or distributions to management. The managers of each
Affiliate thus have an incentive to both increase revenues (thereby increasing
the Operating Allocation) and to control expenses (thereby increasing the Excess
Operating Allocation). The ownership by an Affiliate's management of a portion
of the Affiliate, which entitles them to a portion of the Owners' Allocation,
provides an important additional incentive to managers of each Affiliate to
increase revenues.
The revenue sharing arrangements allow AMG to participate in the growth of
revenues of each Affiliate, because as revenues increase, the Owners' Allocation
also increases. However, AMG participates in that growth to a lesser extent than
the managers of the Affiliate, because AMG does not participate in the growth of
the Operating Allocation. In addition, according to the organizational documents
of the Affiliates, the allocations and distributions to AMG generally take
priority over the allocations and distributions to the management owners of the
Affiliates, to further protect AMG if there are any expenses in excess of the
Operating Allocation of the Affiliate. Thus, if an Affiliate's expenses exceed
its Operating Allocation, the excess expenses first reduce the portion of the
Owners' Allocation allocated to the Affiliate's management owners, until that
portion is eliminated, and then reduce the portion allocated to AMG.
7
<PAGE>
CAPITALIZATION OF RETAINED INTEREST
The incentive effect of retained equity ownership is an integral part of the
AMG Structure. In order to maximize this incentive effect, the organizational
documents of each Affiliate (other than Paradigm Asset Management Company,
L.L.C.) include various provisions for the management owners of that Affiliate
to periodically realize the equity value they have created, by requiring the
Company to purchase portions of their interests in the Affiliate ("Puts"). In
addition, the organizational documents of certain of the Affiliates provide AMG
with the ability to require the management owners to sell portions of their
interests in the Affiliate to AMG ("Calls"). Finally, the organizational
documents of each Affiliate include provisions obligating each such owner to
sell his or her remaining interests at a point in the future, generally after
the termination of his or her employment with the Affiliate. Underlying all of
these provisions is AMG's basic philosophy that management owners of each
Affiliate should maintain an ownership level in that Affiliate within a range
that the Company believes offers them sufficient incentives to grow and improve
their business.
The Puts are designed to let the management owners of an Affiliate realize
portions of the equity value they have created prior to their retirement. In
addition, as an alternative to simply purchasing all of a management owner's
interest in the Affiliate following the termination of his or her employment,
the Puts enable AMG to purchase additional interests in the Affiliates at a more
gradual rate. The Company believes that a more gradual purchase of interests in
Affiliates will make it easier for AMG to keep its ownership of each Affiliate
within a desired range, by transferring purchased interests in the Affiliate to
more junior members of that Affiliate's management. In most cases, the Puts do
not become exercisable for a period of several years from the date of AMG's
investment in an Affiliate, and once exercisable, are generally limited in the
aggregate to a percentage of a given management owner's ownership interests. The
most common formulation among all the Affiliates is that a management owner's
Puts (i) do not commence for five years from the date of AMG's investment (or,
if later, the date he or she purchased his or her interest in the Affiliate),
(ii) are limited, in the aggregate, to fifty percent of the interests he or she
held in the Affiliate, and (iii) are limited, in any twelve-month period, to ten
percent of the greatest interest he or she held in the Affiliate. In addition,
the organizational documents of the Affiliates generally contain a limitation on
the maximum aggregate amount that management owners of any Affiliate may require
AMG to purchase pursuant to their Puts in any given twelve-month period. The
purchase price for Puts to AMG is paid either in cash, AMG stock, or a
combination of cash and AMG stock. If paid in cash, the purchase price for Puts
is generally based on a multiple of the Owners' Allocation of the Affiliate at
the time the Put is exercised, with the multiple generally having been
determined at the time AMG made its initial investment (the "Fair Value Purchase
Price"). If paid in stock, the most common formulation is as follows: AMG will
exchange a number of shares of Common Stock equal in value to seventy-five
percent of the trailing Owners' Allocation purchased in the transaction,
multiplied by the multiple of trailing EBITDA at which AMG Common Stock is then
trading in the public market.
The Calls are designed to provide the Company and management members of
certain Affiliates with the assurance that a mechanism exists for AMG to
facilitate a degree of transition within the senior management team after an
agreed-upon period of time. While the Calls vary in each specific instance, in
all cases, the timing, mechanism and price are agreed upon when AMG makes its
investment, with the price payable in cash or AMG stock and if paid in cash,
with the price generally being the Fair Value Purchase Price.
The organizational documents of each Affiliate provide that the management
owners will realize the remaining equity value they have created generally
following the termination of their employment with the Affiliate. In general,
upon a management owner's retirement after an agreed-upon number of years, or
upon his earlier death, permanent incapacity or termination without cause (but
with AMG's consent), that management owner (or his estate) is required to sell
to AMG (and AMG is required to purchase from the management owner) his or her
remaining interests. The purchase price in these cases is paid either in cash,
AMG stock or a combination of cash and AMG stock. If paid in cash, the purchase
price is generally the
8
<PAGE>
Fair Value Purchase Price, and if paid in stock, the most common formulation is
identical to that used in the payment of a purchase price for Puts in shares of
AMG stock. In general, if a management owner quits early or is terminated for
cause, his or her interests will be purchased by AMG at a reduced multiple which
represents a substantial discount to the Fair Value Purchase Price, and, in
general, if he or she quits or is terminated for cause within the first several
years following AMG's investment (or, if later, the date he or she purchased his
or her interest in the Affiliate) he or she generally receives nothing for his
or her retained interest.
THE AFFILIATES
In general, the Affiliates derive revenues by charging fees to their clients
that are typically based on the market value of assets under management. In some
instances, however, the Affiliates may derive revenues from fees based on
investment performance.
AMG's Affiliates are listed below in alphabetical order and include Essex,
in which AMG invested in March 1998. Unless otherwise indicated, AMG holds a
majority ownership interest in each such Affiliate.
<TABLE>
<CAPTION>
PRO FORMA
AMG'S EQUITY ASSETS UNDER
OWNERSHIP MANAGEMENT
PERCENTAGE AS OF
AS OF DECEMBER 31,
PRINCIPAL DATE OF DECEMBER 31, 1997
AFFILIATE LOCATION(S) INVESTMENT 1997(1) (IN MILLIONS)
- -------------------------------------------------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
The Burridge Group LLC ("Burridge")..................... Chicago December 1996 55.0% $ 1,353
Essex Investment Management Company, LLC ("Essex")...... Boston March 1998 68.0 4,310
First Quadrant, L.P.; First Quadrant Limited Pasadena, CA; March 1996 66.1 26,735(2)
(collectively, "First Quadrant")...................... London
GeoCapital, LLC ("GeoCapital").......................... New York September 1997 60.0 2,391
Gofen and Glossberg, L.L.C. ("Gofen and Glossberg")..... Chicago May 1997 55.0 3,857
J.M. Hartwell Limited Partnership ("Hartwell").......... New York May 1994 74.9 334
Paradigm Asset Management Company, L.L.C. ("Paradigm").. New York May 1995 30.0 1,925
Renaissance Investment Management ("Renaissance")....... Cincinnati November 1995 66.7 1,373
Skyline Asset Management, L.P. ("Skyline").............. Chicago August 1995 62.5 1,214
Systematic Financial Management, L.P. ("Systematic").... Teaneck, NJ May 1995 90.7 1,148
Tweedy, Browne Company LLC ("Tweedy, Browne")........... New York; October 1997 71.2 5,343
London
-------------
Total................................................... $ 49,983
-------------
-------------
</TABLE>
- ------------------------
(1) Except for Essex, in which AMG invested in March 1998.
(2) Includes directly managed assets of $9.2 billion and $17.5 billion of assets
indirectly managed using overlay strategies ("overlay strategies") which
employ futures, options or other derivative securities to achieve a
particular investment objective. These overlay strategies are intended to
add incremental value to the underlying portfolios, which may or may not be
directly managed by First Quadrant, and generate advisory fees which are
generally at the lower end of the range of those generated by First
Quadrant's directly managed portfolios.
The following table provides the pro forma composition of the Company's
assets under management and relative EBITDA Contribution of the Affiliates for
the year ended December 31, 1997.
All amounts below are pro forma for the inclusion of the investments in
Gofen and Glossberg, GeoCapital and Tweedy, Browne as if such transactions
occurred on January 1, 1997 and excludes the Essex Investment. In addition,
EBITDA Contribution and other unaudited pro forma financial data reflect the
Company's Recent Financing (with interest expense adjusted for the terms of the
New Credit Facility) (as such terms are defined in "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources"), the sale of Common Stock sold in the Company's initial public
offering ("IPO") and the application of the net proceeds therefrom, the
conversion of convertible preferred stock into Common Stock, the 50-for-1 split
of each share of Common Stock outstanding prior to the IPO, and the issuance of
shares of Common Stock to the shareholders of an Affiliate in exchange for an
additional ownership interest in that Affiliate, all effected in connection with
the initial public offering.
9
<PAGE>
UNAUDITED PRO FORMA
ASSETS UNDER MANAGEMENT AND EBITDA CONTRIBUTION(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL EBITDA OF TOTAL
--------- CONTRIBUTION ---------
--------------
ASSETS UNDER (IN THOUSANDS)
MANAGEMENT
--------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
CLIENT TYPE:
Institutional................. $ 36,401 80% $ 24,945 47%
Mutual fund................... 3,376 7 16,599 31
High net worth................ 5,276 12 8,555 16
Other......................... 620 1 3,322 6
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
ASSET CLASS:
Equity........................ $ 25,345 56% $ 44,953 84%
Fixed income.................. 2,829 6 2,072 4
Tactical asset allocation..... 17,499 38 6,396 12
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
GEOGRAPHY:
Domestic investments.......... $ 23,425 51% $ 33,130 62%
Global investments............ 22,248 49 20,291 38
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
OTHER PRO FORMA FINANCIAL
DATA:
RECONCILIATION OF EBITDA
CONTRIBUTION TO EBITDA:
Total EBITDA Contribution
(as above)................ $ 53,421
Less holding company
expenses.................. (8,411)
--------------
EBITDA (2).................... $ 45,010
--------------
EBITDA as adjusted (3)........ $ 26,695
OTHER HISTORICAL CASH FLOW
DATA:
Cash flow from operating
activities................ $ 16,205
Cash flow used in investing
activities................ (327,275)
Cash flow from financing
activities................ 327,112
EBITDA (2).................... $ 20,044
EBITDA as adjusted (3)........ $ 10,201
</TABLE>
- ------------------------
(1) As defined by Note (2) on page 3.
(2) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary item. The Company believes EBITDA may be
useful to investors as an indicator of the Company's ability to service
debt, to make new investments and to meet working capital requirements.
EBITDA, as calculated by the Company, may not be consistent with
computations of EBITDA by other companies. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
operating performance or to cash flows from operating activities as a
measure of liquidity.
(3) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation, amortization and extraordinary item. The
Company believes that this measure may be useful to investors as another
indicator of funds available to the Company, which may be used to make new
investments, repay debt obligations, repurchase shares of Common Stock or
pay dividends on Common Stock. EBITDA as adjusted, as calculated by the
Company, may not be consistent with computations of EBITDA as adjusted by
other companies. EBITDA as adjusted is not a measure of financial
performance under generally
10
<PAGE>
accepted accounting principles and should not be considered an alternative
to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity.
COMPETITION
The Company operates as an asset management holding company organized to
invest in mid-sized asset management firms. The Company believes that the market
for investments in asset management companies is, and will continue to remain,
highly competitive. The Company competes with many purchasers of investment
management firms, including other investment management holding companies,
insurance companies, broker-dealers, banks and private equity firms. Many of
these companies, both privately and publicly held, have longer operating
histories and greater resources than the Company, which may make them more
attractive to the owners of firms in which AMG is considering an investment and
may enable them to offer greater consideration to such owners. The Company is
aware of several other holding companies that have been organized to invest in
or acquire less than 100% of investment management firms and the Company views
these firms as among its competitors. Certain of the Company's principal
stockholders also pursue investments in, and acquisitions of, investment
management firms, and the Company may, from time to time, encounter competition
from such principal stockholders with respect to certain investments. The
Company believes that important factors affecting its ability to compete for
future investments are (i) the degree to which target firms view the AMG
Structure as preferable, financially and operationally, to acquisition or
investment arrangements offered by other potential purchasers, (ii) the
attractiveness of AMG's Common Stock as a form of consideration in acquisitions,
and (iii) the reputation and performance of the existing Affiliates and future
affiliates, by which target firms will judge AMG and its future prospects.
The Affiliates compete with a large number of domestic and foreign
investment management firms, including public companies, subsidiaries of
commercial banks, and insurance companies. Many of these firms have greater
resources and assets under management than any of the Affiliates, and offer a
broader array of investment products and services than any of the Affiliates.
From time to time, Affiliates may also compete with other Affiliates for
clients. In addition, there are relatively few barriers to entry by new
investment management firms, especially in the institutional managed accounts
business. AMG believes that the most important factors affecting its Affiliates'
ability to compete for clients are (i) the products offered, (ii) the abilities,
performance records and reputation of its Affiliates and their management teams,
(iii) the management fees charged, (iv) the level of client service offered, and
(v) the development of new investment strategies and marketing. The importance
of these factors can vary depending on the type of investment management service
involved. Each Affiliate's ability to retain and increase assets under
management would be adversely affected if client managed accounts underperform
in comparison to relevant benchmarks, or if key management or employees leave
the Affiliate. The ability of each Affiliate to compete with other investment
management firms is also dependent, in part, on the relative attractiveness of
their respective investment philosophies and methods under then prevailing
market conditions.
GOVERNMENT REGULATION
Virtually all aspects of the Affiliates' businesses are subject to extensive
regulation. Each Affiliate (other than First Quadrant Limited) is registered
with the Securities and Exchange Commission (the "Commission") as an investment
adviser under the Investment Advisers Act. As an investment adviser, each such
Affiliate is subject to the provisions of the Investment Advisers Act and the
Commission's regulations promulgated thereunder. The Investment Advisers Act
imposes numerous obligations on registered investment advisers, including
fiduciary, recordkeeping, operational, and disclosure obligations. Each of the
Affiliates (other than First Quadrant Limited) is, as an investment adviser,
also subject to regulation under the securities laws and fiduciary laws of
certain states. Each of the mutual funds for which Tweedy, Browne and Skyline
are advisors is registered with the Commission under the 1940 Act, shares of
each such fund are registered with the Commission under the Securities Act of
1933, as amended (the "Securities Act"), and the shares of each such fund are
qualified for sale (or exempt from such
11
<PAGE>
qualification) under the laws of each state and the District of Columbia to the
extent such shares are sold in any of such jurisdictions. In addition, each of
Renaissance, Systematic and Essex are subadvisors for one or more mutual funds.
As an adviser or subadviser to a registered investment company, each such
Affiliate is subject to requirements under the 1940 Act and the Commission's
regulations promulgated thereunder. The Affiliates are also subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), and to regulations
promulgated thereunder, insofar as they are "fiduciaries" under ERISA with
respect to certain of their clients. ERISA and the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code") impose certain duties on
persons who are fiduciaries under ERISA, and prohibit certain transactions
involving the assets of each ERISA plan which is a client of an Affiliate, as
well as certain transactions by the fiduciaries (and certain other related
parties) to such plans. Each of First Quadrant, L.P. and Renaissance is also
registered with the Commodity Futures Trading Commission as a Commodity Trading
Advisor and each is a member of the National Futures Association. Tweedy, Browne
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended and is subject to regulation by the Commission, the National Association
of Securities Dealers, Inc. and other federal and state agencies. As a
registered broker-dealer, Tweedy, Browne is subject to the Commission's net
capital rules. Under certain circumstances, these rules may limit the ability of
Tweedy, Browne to make distributions to the Company.
A number of the Affiliates are subject to the laws of non-U.S. jurisdictions
and non-U.S. regulatory agencies or bodies. For example, First Quadrant Limited,
located in London, is a member of the Investment Management Regulatory
Organisation of the United Kingdom, and Tweedy, Browne and other Affiliates are
investment advisers to certain funds which are organized under non-U.S.
jurisdictions, including Luxembourg (where they are regulated by the Institute
Monetaire Luxembourgeois) and Bermuda (where they are regulated by the Bermuda
Monetary Authority).
Under the Investment Advisers Act, every investment advisory contract
between a registered investment adviser and its clients must provide that it may
not be assigned by the investment adviser without the consent of the client. In
addition, under the 1940 Act, each contract with a registered investment company
must provide that it terminates upon its assignment. Under both the Investment
Advisers Act and the 1940 Act, an investment advisory contract is deemed to have
been assigned in the case of a direct "assignment" of the contract as well as in
the case of a sale, directly or indirectly, of a "controlling block" of the
adviser's voting securities. Such an assignment may be deemed to take place when
a firm is acquired by AMG. Prior to AMG's investment, each Affiliate sought to
obtain the consent of its clients to the assignment of the advisory contracts
which results from the acquisition (and, in the case of mutual fund clients,
sought to obtain new advisory contracts on substantially the same terms). Each
investment consummated thus far has been, and the Company expects that each
future investment will be, conditioned on the obtaining of such consents (and,
to the extent applicable, new contracts) from substantially all of the clients
of the acquired firm. Because the reduction or dilution of the interests in AMG
of certain of AMG's stockholders could be considered to constitute a deemed
"assignment" of AMG's Affiliates' contracts with their clients, each of AMG's
Affiliates will solicit their clients' consents to such a reduction or dilution.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Affiliates from conducting their business in the event that they fail to
comply with such laws and regulations. Possible sanctions that may be imposed in
the event of such noncompliance include the suspension of individual employees,
limitations on the Affiliate's business activities for specified periods of
time, revocation of the Affiliate's registration as an investment adviser,
commodity trading adviser and/or other registrations, and other censures and
fines. Changes in these laws or regulations could have a material adverse impact
on the profitability and mode of operations of the Company and each of its
Affiliates.
The officers, directors and employees of AMG and each of the Affiliates may,
from time to time, own securities that are also owned by one or more of the
Affiliates' clients. Each Affiliate and AMG has
12
<PAGE>
internal policies with respect to individual investments and requires reports of
securities transactions and restricts certain transactions so as to minimize
possible conflicts of interest.
EMPLOYEES
As of December 31, 1997, the Company and its Affiliates employed
approximately 311 persons, approximately 293 of which are full-time employees.
The Company and its Affiliates are not subject to any collective bargaining
agreements and the Company believes that its labor relations are good.
CORPORATE LIABILITY AND INSURANCE
The businesses of the Affiliates entail the inherent risk of liability
related to litigation from clients and actions taken by regulatory agencies. In
addition, the Company faces liability both directly as a control person, and
indirectly as a direct or indirect general partner of certain of the Affiliates.
To protect its overall operations from such potential liabilities, the Company
and each of its Affiliates maintains errors and omissions and general liability
insurance in amounts which the Company and its Affiliates' management consider
appropriate. There can be no assurance, however, that a claim or claims will not
exceed the limits of available insurance coverage, that any insurer will remain
solvent and will meet its obligations to provide coverage, or that such coverage
will continue to be available with sufficient limits or at a reasonable cost. A
judgment against one of the Affiliates or the Company in excess of available
coverage could have a material adverse effect on the Company.
CAUTIONARY STATEMENTS
The Company's growth strategy includes acquiring ownership interests in
investment management firms. To date, AMG has invested in eleven such firms and
intends to continue this investment program in the future, subject to its
ability to locate suitable investment management firms in which to invest and
its ability to negotiate agreements with such firms on acceptable terms. There
can be no assurance that AMG will be successful in locating or investing in such
firms or that any of such firms will have favorable operating results.
The Company's acquisitions of interests in investment management firms
require substantial capital investments. Although the Company believes that its
existing cash resources and cash flow from operations will be sufficient to meet
the Company's working capital needs for normal operations for the foreseeable
future, these sources of capital are not expected to be sufficient to fund
anticipated investments. Therefore, the Company will need to raise capital
through the incurrence of additional long-term or short-term indebtedness or the
issuance of additional equity securities in private or public transactions in
order to complete further investments. This could result in dilution of existing
equity positions, increased interest expense or decreased net income. There can
be no assurance that acceptable financing for future investments can be obtained
on suitable terms, if at all.
The Company has outstanding indebtedness of $222.3 million under its New
Credit Facility (as defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operation-- Liquidity and Capital Resources")
as of March 20, 1998, and anticipates that it will incur additional indebtedness
in the future in connection with investments in investment management firms and
to fund working capital. The Company will be subject to risks normally
associated with debt financing. Accordingly, the Company will be subject to the
risk that a substantial portion of the Company's cash flow may be required to be
dedicated to the payment of the Company's debt service obligations or even that
its cash flow will be insufficient to meet required payments of principal and
interest. The failure to make any required debt service payments or to comply
with any restrictive or financial covenants contained in any debt instrument
could give rise to a default permitting acceleration of the debt under such
instrument as well as debt under other instruments that contain
cross-acceleration or cross-default provisions, which could have an adverse
effect on the Company's financial condition and prospects. The New Credit
Facility
13
<PAGE>
contains, and future debt instruments may contain, restrictive covenants that
could limit the Company's ability to obtain additional debt financing and could
adversely affect the Company's ability to make future investments in investment
management firms. The New Credit Facility prohibits the payment of dividends and
other distributions to stockholders of the Company and restricts the Company,
the Affiliates and the Company's other subsidiaries from incurring indebtedness,
incurring liens, disposing of assets and engaging in extraordinary transactions.
The Company is also required to comply with certain financial covenants on an
ongoing basis. The Company's ability to borrow under the New Credit Facility is
conditioned upon its compliance with the requirements of the New Credit
Facility, and any non-compliance with those requirements could give rise to a
default entitling the lenders to accelerate all outstanding borrowings under the
New Credit Facility. In addition, the New Credit Facility bears interest at
variable rates and future indebtedness may also bear interest at variable rates.
An increase in interest rates on such indebtedness would increase the Company's
interest expense, which could adversely affect the Company's cash flow and
ability to meet its debt service obligations. Although the Company has entered
into interest rate hedging contracts designed to offset a portion of the
Company's exposure to interest rate fluctuations above certain levels, there can
be no assurance that this objective will be achieved, and, if prevailing
interest rates drop below a given point, the Company may be obligated to pay a
higher interest rate under the hedging contracts than would otherwise apply
under the actual indebtedness.
At December 31, 1997, the Company's total assets were approximately $457
million, of which approximately $393 million were intangible assets consisting
of acquired client relationships and goodwill. There can be no assurance that
the value of such intangible assets will ever be realized by the Company. In
addition, the Company intends to invest in additional investment management
firms in the future. While these firms may contribute additional revenue to the
Company, such investments will also result in the recognition of additional
intangible assets which will cause further increases in amortization expense.
The loss of key management personnel or an inability to attract, retain and
motivate sufficient numbers of qualified management personnel on the part of the
Company or any of its Affiliates would adversely affect the Company's business.
The market for investment managers is extremely competitive and is increasingly
characterized by frequent movement by investment managers among different firms.
In addition, individual investment managers at the Affiliates often have regular
direct contact with particular clients, which can lead to a strong client
relationship based on the client's trust in that individual manager. The loss of
a key investment manager of certain of the Affiliates could jeopardize the
Affiliate's relationships with its clients and lead to the loss of the client
accounts at such Affiliate. Losses of such accounts could have a material
adverse effect on the results of operations and financial condition of the
Affiliate and, in the case of certain of the Affiliates, the Company. Although
the Company uses a combination of economic incentives, vesting provisions, and,
in some instances, non-solicitation agreements and employment agreements as a
means of seeking to retain key management personnel at the Company and each of
the Affiliates, there can be no assurance that key management personnel will
remain with their respective firms.
The Company's Affiliates offer a broad range of investment management
services and styles to institutional and retail investors. Across all the
Affiliates, the Company operates in a number of sectors within the investment
management industry, both with respect to products and distribution channels.
Consequently, the Company's performance is directly affected by conditions in
the financial and securities markets. The financial markets and the investment
management industry in general have experienced record performance and record
growth in recent years. The financial markets and businesses operating in the
securities industry, however, are highly volatile and are directly affected by,
among other factors, domestic and foreign economic conditions and general trends
in business and finance, all of which are beyond the control of the Company.
There can be no assurance that broader market performance will be favorable in
the future. Any decline in the financial markets or a lack of sustained growth
may result in a corresponding decline in performance by the Affiliates and may
adversely affect assets under management and/or fees at the Affiliate level,
which would reduce cash flow distributable to the Company.
14
<PAGE>
Substantially all of the Affiliates' revenues are derived from investment
management contracts which are typically terminable, without the payment of a
penalty, in the case of contracts with mutual fund clients, upon 60 days'
notice, and, in the case of institutional contracts, upon 30 days' notice.
Because of this, clients of the Affiliates may withdraw funds from accounts
under management by the Affiliates generally in their sole discretion. In
addition, the Affiliates' contracts generally provide for fees payable for
investment management services based on the market value of assets under
management, although a portion also provide for the payment of fees based on
investment performance. Because most contracts provide for a fee based on market
values of securities, fluctuations in securities prices may have an adverse
effect on the Company's consolidated results of operations and financial
condition. Changes in the investment patterns of clients will also affect the
total assets under management. In addition, in the case of contracts which
provide for the payment of performance-based fees, the investment performance of
the Affiliates will affect the Company's consolidated results of operations and
financial condition. Some of the Affiliates' fees are higher than those of other
investment managers for similar types of investment services. Each Affiliate's
ability to maintain its fee structure in a competitive environment is dependent
on the ability of the Affiliate to provide clients with investment returns and
service that will cause clients to be willing to pay those fees. There can be no
assurance that any given Affiliate will be able to retain its fee structure or,
with such fee structure, retain its clients in the future.
While AMG's agreements with the Affiliates contain provisions pursuant to
which each Affiliate has agreed to pay to AMG a specified percentage of such
Affiliate's gross revenues, there can be no assurance that distributions will
always be made by the Affiliates to AMG or as to the amounts of any
distributions. In the organizational documents of each Affiliate, the
distributions to AMG represent only a portion of the revenues of the Affiliate,
with the remainder being retained by the Affiliate for the payment of expenses
or distributed to its management team as bonuses or distributions. In addition,
the payment of distributions to AMG may be subject to limitations under the laws
of the jurisdiction of organization of each of the Affiliates, regulatory
requirements, claims of creditors of each such Affiliate and applicable
bankruptcy and insolvency laws.
In connection with its investments in each of its Affiliates, AMG has agreed
to purchase ownership interests retained by the Affiliate's management team in
certain amounts, at certain times and at certain prices. Consequently, AMG may
be required to pay cash (which may require the incurrence of additional
indebtedness) or issue new shares of Common Stock to its Affiliates' managers.
As set forth above, such transactions could result in increased interest
expense, dilution of existing equity positions and decreased net income. In
addition, these transactions will result in the Company's ownership interests in
its Affiliates changing from time to time, which may have an adverse affect on
the Company's cash flow and liquidity.
Although AMG retains both the authority to prevent and cause certain types
of activities by the Affiliates and has voting and veto rights regarding
significant decisions pursuant to its agreements with the Affiliates, the
Affiliates are authorized to manage and conduct their own day-to-day operations,
including matters relating to employees who are not also owners, investment
management policies and fee structures, product development, client
relationships, compensation programs and compliance activities. Accordingly,
under these agreements, AMG generally does not alter Affiliate day-to-day
decisions, policies and strategies. Similarly, an Affiliate's non-compliance
with regulatory requirements that AMG might detect if it operated the business
of the Affiliates itself may not be detected by AMG as quickly, if at all, which
may adversely affect the Company's financial condition and results of
operations.
Certain of the Company's existing Affiliates are organized as partnerships
that include the Company as a general partner. Consequently, to the extent any
such Affiliate incurs liabilities or expenses which exceed its ability to pay or
fulfill such liabilities or expenses, the Company would be liable for their
payment.
In addition, in the context of certain liabilities, the Company could be
held liable, as a control person, for acts of Affiliates or their employees. The
Company and its Affiliates maintain errors and omissions and
15
<PAGE>
general liability insurance in amounts which the Company and its Affiliates'
management consider appropriate. There can be no assurance, however, that a
claim or claims will not exceed the limits of available insurance coverage, that
any insurer will remain solvent and will meet its obligations to provide
coverage, or that such coverage will continue to be available with sufficient
limits or at a reasonable cost. A judgment against any of the Affiliates or the
Company in excess of available coverage could have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
AMG's executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, AMG currently occupies 8,047 square feet
under a lease that expires in March 2003. Each of the Affiliates also leases
office space in the cities in which they conduct business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its Affiliates may be parties to various
claims, suits and complaints. Currently, there are no such claims, suits or
complaints that, in the opinion of management, would have a material adverse
effect on the Company's financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 4, 1997, the Company submitted the following matters to the
stockholders of the Company in connection with the Company's initial public
offering of Common Stock: (i) approval of an Amended and Restated Certificate of
Incorporation of the Company (the "Amended Certificate") to be effective on the
date the Securities and Exchange Commission declared the Company's registration
statement for its initial public offering effective, (ii) approval of a further
Amended and Restated Certificate of Incorporation of the Company to be effective
immediately upon the closing of the Company's initial public offering of its
Common Stock, (iii) approval of Amended and Restated By-laws of the Company to
be effective upon the effectiveness of the Amended Certificate, and (iv)
approval of the Affiliated Managers Group, Inc. 1997 Stock Option and Incentive
Plan, which provides for the issuance of up to 1,750,000 shares of Common Stock.
Each of these matters was approved by the unanimous written consent of the
Company's stockholders on November 14, 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (symbol:
AMG). The following table sets forth the high and low closing prices as reported
on the New York Stock Exchange composite tape since the Company's initial public
offering on November 21, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ----------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Fourth Quarter (from November 21, 1997 through December 31, 1997)........................ $ 29.875 $ 24.00
</TABLE>
The closing price for the shares on the New York Stock Exchange on March 13,
1998 was $37.125.
As of December 31, 1997 there were 57 stockholders of record. As of March
13, there were 63 stockholders of record.
The Company has not declared a dividend with respect to the periods
presented. The Company intends to retain earnings to repay debt and to finance
the growth and development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The New Credit Facility
(as defined herein) also prohibits the Company from making dividend payments to
its stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources."
SALES OF UNREGISTERED SECURITIES DURING 1997
During 1997, the Company issued unregistered securities to a limited number
of persons, as described below. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in any such transaction,
and the Company believes that each transaction was exempt from the registration
requirements of the Securities Act, by reason of Section 4(2) thereof, based on
the private nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning the
Company and acquired the securities for investment and not with a view to the
distribution thereof.
(1) On January 2, 1997, the Company issued an aggregate of 1,715 shares
of Series B-1 Voting Convertible Preferred Stock (convertible into 85,750
shares of Common Stock) with a value of approximately $1.5 million as
consideration for shares of capital stock of The Burridge Group Inc. in
connection with the Company's investment in Burridge. The shares of Series
B-1 Voting Convertible Preferred Stock were converted into Common Stock in
connection with the Company's initial public offering in November 1997.
(2) On September 30, 1997, the Company issued an aggregate of 10,667
shares of Class D Convertible Preferred Stock (convertible into 533,350
shares of Common Stock) with a value of approximately $9.6 million to the
stockholders of GeoCapital Corporation in connection with the Company's
investment in GeoCapital. The shares of Class D Convertible Preferred Stock
were converted into Common Stock in connection with the Company's initial
public offering in November 1997.
(3) On October 9, 1997, the Company issued (i) an aggregate of 5,333
shares of Series C-2 Non-Voting Convertible Preferred Stock and warrants to
purchase 28,000 shares of Series C-2 Non-Voting Convertible Preferred Stock
(the "Series C-2 Warrants") (convertible into 266,650 and 1,400,000 shares
of Common Stock, respectively) to Chase Equity Associates for an aggregate
purchase price of $30 million; (ii) senior subordinated notes (the
"Subordinated Notes") to Chase Equity Associates for $60 million; and (iii)
warrants to purchase Class B Common Stock (the "Class B Warrants") of the
Company into an escrow, to be issued to the holders of the Subordinated
Notes if such Subordinated
17
<PAGE>
Notes were not paid on or prior to April 7, 1998. In connection with the
Company's initial public offering in November 1997, the shares of Series C-2
Non-Voting Convertible Preferred Stock (including those issued upon
conversion of the Series C-2 Warrants) were converted into Common Stock, the
Subordinated Notes were repaid and the Class B Warrants were extinguished.
REPORT OF USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
The Company completed the initial public offering of its Common Stock in
November 1997. The initial public offering was made pursuant to (i) a
Registration Statement on Form S-1, originally filed with the Commission on
August 29, 1997, as amended (Commission File No. 333-34679), and (ii) a
Registration Statement on Form S-1, filed with the Commission pursuant to Rule
462(b) under the Securities Act on November 20, 1997 (Commission File No.
333-40699), both of which registration statements became effective on November
20, 1997. The initial public offering commenced on November 21, 1997 and
terminated shortly thereafter after the sale into the public market of all of
the registered shares of Common Stock.
The shares of Common Stock sold in the initial public offering were offered
for sale in the United States by a syndicate of U.S. underwriters represented by
Goldman, Sachs & Co., BT Alex. Brown Incorporated, Merrill Lynch, Pierce Fenner
& Smith Incorporated and Schroder & Co., Inc., and outside the United States by
a syndicate of international underwriters represented by Goldman Sachs
International, BT Alex. Brown International, a division of Bankers Trust
International PLC, Merrill Lynch International and J. Henry Schroder & Co.
Limited.
The Company registered an aggregate of 8,625,000 shares of Common Stock
(including 1,125,000 shares issued upon the exercise of the underwriters'
overallotment options) for sale in the initial public offering at a per share
price of $23.50, for an aggregate offering price of approximately $202.7
million. All of such shares were registered for the Company's account. As stated
above, all of such shares were sold shortly after the commencement of the
offering.
The Company incurred the following expenses in connection with the initial
public offering (in millions):
<TABLE>
<S> <C>
Underwriting discounts and commissions............................... $ 13.1
Other expenses....................................................... 2.6
---------
Total expenses....................................................... $ 15.7
</TABLE>
After deducting the expenses set forth above, the Company received
approximately $187.0 million in net proceeds of the initial public offering. The
Company used $60.0 million of the proceeds to repay the Subordinated Notes
issued to Chase Equity Associates and approximately $125.8 million of the
proceeds to repay borrowings under the Company's then existing senior credit
facility with a syndicate of banks led by The Chase Manhattan Bank and an
additional $1.2 million to pay accrued interest.
Chase Equity Associates is a limited partnership whose sole limited partner
is an affiliate of Chase Manhattan Corporation (the parent company of The Chase
Manhattan Bank) and whose sole general partner has as its partners certain
employees of The Chase Manhattan Bank (including John M.B. O'Connor, a director
of the Company) and an affiliate of Chase Manhattan Corporation. Chase
Securities Inc., also an affiliate of Chase Equity Associates, was a participant
in the underwriting syndicate of the U.S. portion of the initial public
offering.
18
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected financial data for the Company for the four
years since inception, December 29, 1993. This data should be read in
conjunction with, and is qualified in its entirety by reference to, the
financial statements and accompanying notes included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT AS INDICATED
AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues.............................................................. $ 5,374 $ 14,182 $ 50,384 $ 95,287
Operating expenses:
Compensation and related expenses................................... 3,591 6,018 21,113 41,619
Amortization of intangible assets................................... 774 4,174 8,053 6,643
Depreciation and other amortization................................. 19 133 932 1,915
Other operating expenses............................................ 1,000 2,567 13,115 22,549
--------- --------- --------- ---------
Total operating expenses.......................................... 5,384 12,892 43,213 72,726
--------- --------- --------- ---------
Operating income (loss)............................................... (10) 1,290 7,171 22,561
Non-operating (income) and expenses:
Investment and other income....................................... (966) (265) (337) (1,174)
Interest expense.................................................. 158 1,244 2,747 8,479
--------- --------- --------- ---------
(808) 979 2,410 7,305
--------- --------- --------- ---------
Income before minority interest, income taxes and extraordinary
item................................................................ 798 311 4,761 15,256
Minority interest(1).................................................. (305) (2,541) (5,969) (12,249)
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item.............. 493 (2,230) (1,208) 3,007
Income taxes.......................................................... 699 706 181 1,364
--------- --------- --------- ---------
Income (loss) before extraordinary item............................... (206) (2,936) (1,389) 1,643
--------- --------- --------- ---------
Extraordinary item.................................................... -- -- (983) (10,011)
--------- --------- --------- ---------
Net (loss)............................................................ $ (206) $ (2,936) $ (2,372) $ (8,368)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) per share(2)--basic........................................ $ (0.07) $ (2.95) $ (5.49) $ (3.69)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) per share(2)--diluted...................................... $ (0.07) $ (2.95) $ (5.49) $ (1.02)
--------- --------- --------- ---------
--------- --------- --------- ---------
Average shares outstanding--basic..................................... 3,030,548 996,144 431,908 2,270,684
Average shares outstanding--diluted................................... 3,030,548 996,144 431,908 8,235,529
OTHER FINANCIAL DATA
Assets under management (at period end, in millions).................. $ 755 $ 4,615 $ 19,051 $ 45,673
EBITDA(3)............................................................. 1,444 3,321 10,524 20,044
EBITDA as adjusted(4)................................................. 587 1,371 7,596 10,201
Cash flow from operating activities................................... 818 1,292 6,185 16,205
Cash flow used in investing activities................................ (6,156) (37,781) (29,210) (327,275)
Cash flow from financing activities................................... 9,509 46,414 15,650 327,112
BALANCE SHEET DATA
Current assets........................................................ $ 4,791 $ 16,847 $ 23,064 $ 52,058
Acquired client relationships, net.................................... 3,482 18,192 30,663 142,875
Goodwill, net......................................................... 5,417 26,293 40,809 249,698
Total assets.......................................................... 13,808 64,699 101,335 456,990
Current liabilities................................................... 2,021 4,111 23,591 18,815
Senior debt........................................................... -- 18,400 33,400 159,500
Total liabilities..................................................... 3,925 26,620 60,856 180,771
Minority interest(1).................................................. 80 1,212 3,490 16,479
Preferred stock....................................................... 10,004 40,008 42,476 --
Stockholders' equity.................................................. 9,803 36,867 36,989 259,740
</TABLE>
19
<PAGE>
- ------------------------
(1) All but one of the Company's Affiliates are majority-owned subsidiaries (the
Company owns less than a 50% interest in Paradigm which is accounted for
under the equity method of accounting). The portion of each Affiliate's
operating results and net assets that are owned by minority owners of each
Affiliate is accounted for as minority interest.
(2) The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). This
standard became effective for financial statements issued for periods ending
after December 15, 1997. The Company has adopted FAS 128 for its fiscal year
ending December 31, 1997 and has restated prior-period EPS data to conform
to the new standard. The calculation for the basic earnings per share is
based on the weighted average of common shares outstanding during the
period. The calculation for the diluted earnings per share is based on the
weighted average of common and common equivalent shares outstanding during
the period. Because the computation of diluted EPS shall not assume exercise
of securities that would have an anti-dilutive effect on earnings per share,
as is the case in a loss year before extraordinary item, the effect of
outstanding convertible preferred stock and unvested restricted common stock
was excluded from the diluted calculation in 1994, 1995 and 1996.
(3) As defined by Note(2) on page 10.
(4) As defined by Note(3) on page 10.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-K AND IN FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL
STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS
OR PHRASES "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS
ANTICIPATED", "BELIEVES", "ESTIMATE", "PROJECT" OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE CAPTION
"BUSINESS--CAUTIONARY STATEMENTS", THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR
PROJECTED. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. THE
COMPANY WISHES TO ADVISE READERS THAT THE FACTORS DISCUSSED IN
"BUSINESS--CAUTIONARY STATEMENTS", AS WELL AS OTHER FACTORS, COULD AFFECT THE
COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED
WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS.
THE COMPANY WILL NOT UNDERTAKE AND SPECIFICALLY DECLINES ANY OBLIGATION TO
RELEASE PUBLICLY THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
OVERVIEW
The Company acquires equity positions in mid-sized investment management
firms, and derives its revenues from such firms. AMG has a revenue sharing
arrangement with each Affiliate which is contained in the organizational
document of that Affiliate. Each such arrangement allocates a specified
percentage of revenues (typically 50-70%) for use by management of that
Affiliate in paying operating expenses of the Affiliate, including salaries and
bonuses (the "Operating Allocation"). The remaining portion of revenues of the
Affiliate, typically 30-50% (the "Owners' Allocation"), is allocated to the
owners of that Affiliate (including the Company), generally in proportion to
their ownership of the Affiliate.
One of the purposes of the revenue sharing arrangements is to provide
ongoing incentives for the managers of the Affiliates. The revenue sharing
arrangements are designed to allow each Affiliate's managers to participate in
that firm's growth (through their compensation paid out of the Operating
Allocation and their ownership of a portion of the Owners' Allocation) and to
make operating expenditures freely within the limits of the Operating
Allocation. The portion of the Operating Allocation that is not used to pay
salaries and other operating expenses (the "Excess Operating Allocation") is
generally available to be used at the discretion of management of such
Affiliate, including for the payment of
20
<PAGE>
bonuses or distributions to management. The managers of each Affiliate thus have
an incentive to increase revenues (thereby increasing the Operating Allocation)
and control expenses (thereby increasing the Excess Operating Allocation). The
ownership by an Affiliate's management of a portion of the Affiliate, which
entitles them to a portion of the Owners' Allocation, provides an important
additional incentive to managers of each Affiliate to increase revenues.
The revenue sharing arrangements allow AMG to participate in the growth of
revenues of each Affiliate, because as revenues increase, the Owners' Allocation
also increases. However, the Company participates in that growth to a lesser
extent than the managers of the Affiliate, because AMG does not participate in
the growth of the Operating Allocation.
The portion of each Affiliate's revenues which is included in its Operating
Allocation and used to pay salaries, bonuses and other operating expenses, as
well as the portion of each Affiliate's revenues which is included in its
Owners' Allocation and distributed to AMG and the other owners of the Affiliate,
are both included as "revenues" on the Company's Consolidated Statements of
Operations. The expenses of each Affiliate which are paid out of the Operating
Allocation, as well as the holding company expenses of AMG which are paid by the
Company out of the Owners' Allocation which AMG receives from the Affiliates,
are both included in "operating expenses" on the Company's Consolidated
Statements of Operations. The portion of each Affiliate's Owners' Allocation
which is allocated to owners of the Affiliates other than the Company is
included in "minority interest" on the Company's Consolidated Statements of
Operations.
The EBITDA Contribution of an Affiliate represents the Owners' Allocation of
that Affiliate allocated to AMG before interest, income taxes, depreciation and
amortization of that Affiliate. EBITDA Contribution does not include holding
company expenses of AMG.
The Affiliates' revenues are derived from the provision of investment
management services for fees. Investment management fees are usually determined
as a percentage fee charged on periodic values of a client's assets under
management. Certain of the Affiliates bill advisory fees for all or a portion of
their clients based upon assets under management valued at the beginning of a
billing period ("in advance"). Other Affiliates bill advisory fees for all or a
portion of their clients based upon assets under management valued at the end of
the billing period ("in arrears"). Advisory fees billed in advance will not
reflect subsequent changes in the market value of assets under management for
that period. Conversely, advisory fees billed in arrears will reflect changes in
the market value of assets under management for that period. In addition,
several of the Affiliates charge performance-based fees to certain of their
clients which result in payments to the applicable Affiliate if specified levels
of investment performance are achieved. All references to "assets under
management" include assets directly managed as well as assets underlying overlay
strategies which employ futures, options or other derivative securities to
achieve a particular investment objective.
The Company's level of profitability will depend on a variety of factors
including principally: (i) the level of Affiliate revenues, which is dependent
on the ability of the Affiliates and future affiliates to maintain or increase
assets under management by maintaining their existing investment advisory
relationships and fee structures, marketing their services successfully to new
clients, and obtaining favorable investment results; (ii) the receipt of Owners'
Allocation, which is dependent on the ability of the Affiliates and future
affiliates to maintain certain levels of operating profit margins; (iii) the
availability and cost of the capital with which AMG finances its investments;
(iv) the Company's success in attracting new investments and the terms upon
which such transactions are completed; (v) the level of intangible assets and
the associated amortization resulting from the Company's investments; (vi) the
level of expenses incurred by AMG for holding company operations, including
compensation for its employees; and (vii) the level of taxation to which the
Company is subject, all of which are, to some extent, dependent on factors which
are not in the Company's control, such as general securities market conditions.
Since its founding in December 1993, the Company has completed 11
investments in Affiliates. The most recent investment, in Essex, was completed
in March 1998 and is not included in pro forma operating
21
<PAGE>
results except where indicated. In May, September and October 1997, the Company
completed investments in Gofen and Glossberg, GeoCapital and Tweedy, Browne,
respectively. The Company also made investments during March and December 1996,
in First Quadrant and Burridge, respectively. The Tweedy, Browne investment is
the Company's largest to date, representing 54% of the Affiliates' pro forma
EBITDA Contribution (which does not include Essex) for the year ended December
31, 1997.
The Company's investments have been accounted for under the purchase method
of accounting under which goodwill is recorded for the excess of the purchase
price for the acquisition of interests in Affiliates over the fair value of the
net assets acquired, including acquired client relationships.
As a result of the series of investments made by the Company, intangible
assets (goodwill and acquired client relationships) constitute a substantial
percentage of the assets of the Company and the Company's results of operations
have included increased charges for amortization of those intangible assets. As
of December 31, 1997, the Company's total assets were approximately $457.0
million, of which approximately $142.9 million consisted of "acquired client
relationships" and $249.7 million consisted of "goodwill" (collectively,
acquired client relationships and goodwill are referred to as "intangible
assets"). The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for the Company's investments
to date ranging from nine to 26 years in the case of acquired client
relationships and 15 to 35 years in the case of goodwill. In determining the
amortization period for intangible assets acquired, the Company considers a
number of factors including: the firm's historical and potential future
operating performance; the firm's historical and potential future rates of
attrition among clients; the stability and longevity of existing client
relationships; the firm's recent, as well as long-term, investment performance;
the characteristics of the firm's products and investment styles; the stability
and depth of the firm's management team; and the firm's history and perceived
franchise or brand value. The Company continuously evaluates all components of
intangible assets to determine whether there has been any impairment in their
carrying value or their useful lives. The Company makes such evaluations
quarterly on an Affiliate-by-Affiliate basis to assess if facts and
circumstances exist which suggest an impairment has occurred in the value of the
intangible assets or if the amortization period needs to be shortened. If such a
condition exists, the Company will evaluate the recoverability of the intangible
asset by preparing a projection of the undiscounted future cash flows of the
Affiliate. If impairment is indicated, then the carrying amount of intangible
assets, including goodwill, will be reduced to their fair values.
While amortization of intangible assets has been charged to the results of
operations and is expected to be a continuing material component of the
Company's operating expenses, management believes it is important to distinguish
this expense from other operating expenses since such amortization does not
require the use of cash. Because of this, and because the Company's
distributions from its Affiliates are based on their Owners' Allocation,
management has provided additional supplemental information in this annual
report for "cash-related" earnings, as an addition to, but not as a substitute
for, measures related to net income. Such measures are (i) EBITDA, which the
Company believes is useful to investors as an indicator of the Company's ability
to service debt, make new investments and meet working capital requirements, and
(ii) EBITDA as adjusted, which the Company believes is useful to investors as
another indicator of funds available to the Company, which may be used to make
new investments, repay debt obligations, repurchase shares of Common Stock or
pay dividends on Common Stock.
RESULTS OF OPERATIONS
SUPPLEMENTAL PRO FORMA INFORMATION
Affiliate operations are included in the Company's historical financial
statements from their respective dates of acquisition. The Company consolidates
Affiliates when it owns a controlling interest and includes in minority interest
the portion of capital and Owners' Allocation owned by persons other than the
Company. One of the Company's Affiliates, Paradigm, is not controlled by the
Company and is accounted for under the equity method of accounting.
22
<PAGE>
Because the Company has made investments during each of the periods for
which financial statements are presented, the Company believes that the
historical operating results for these periods are not directly comparable.
Substantially all of the changes in the Company's income, expense and balance
sheet categories result from the inclusion of the acquired businesses from the
dates of their investment.
All amounts in the table which follows are pro forma for the inclusion of
the 1997 investments in Gofen and Glossberg, GeoCapital and Tweedy, Browne as if
such transactions occurred on January 1, 1997. In addition, EBITDA Contribution
and other pro forma financial data reflect the Company's Recent Financing (with
interest expense adjusted for the terms of the New Credit Facility) (as such
terms are defined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources"), the
sale of Common Stock sold in the Company's IPO and the application of the net
proceeds therefrom, the conversion of preferred stock into Common Stock, the
50-for-1 split of each share of Common Stock outstanding prior to the IPO, and
the issuance of shares of Common Stock to the shareholders of an Affiliate in
exchange for an additional ownership interest in that Affiliate, all effected in
connection with the initial public offering. Such information is provided to
enhance the reader's understanding and evaluation of the effects to the Company
of Tweedy, Browne, AMG's largest affiliate by EBITDA contribution.
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
(IN MILLIONS)
<S> <C>
<CAPTION>
UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION:
<S> <C>
Assets under Management--at period end:
Tweedy, Browne............................................................................... $ 5,343
Other Affiliates............................................................................. 40,330
-------
Total...................................................................................... $ 45,673
-------
-------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Revenues:
Tweedy, Browne............................................................................... $ 53,506
Other Affiliates............................................................................. 93,653
--------
Total...................................................................................... $ 147,159
--------
--------
Owners' Allocation(1):
Tweedy, Browne............................................................................... $ 36,314
Other Affiliates(2).......................................................................... 36,838
--------
Total...................................................................................... $ 73,152
--------
--------
EBITDA Contribution(3):
Tweedy, Browne............................................................................... $ 28,643
Other Affiliates(4).......................................................................... 24,778
--------
Total...................................................................................... $ 53,421
--------
--------
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA
Total EBITDA Contribution (as above)......................................................... $ 53,421
Less holding company expenses................................................................ (8,411)
--------
EBITDA(5)...................................................................................... $ 45,010
--------
EBITDA as adjusted(6).......................................................................... $ 26,695
HISTORICAL CASH FLOW AND OTHER DATA:
Cash flow from operating activities.......................................................... $ 16,205
Cash flow used in investing activities....................................................... (327,275)
Cash flow from financing activities.......................................................... 327,112
EBITDA(5).................................................................................... $ 20,044
EBITDA as adjusted(6)........................................................................ $ 10,201
</TABLE>
- ------------------------
(1) As defined in "Business--AMG Structure and Relationship with
Affiliates--Revenue Sharing Arrangements" on page 6.
(2) No Affiliate other than Tweedy, Browne accounted for more than 16% of
Owners' Allocation for the year ended December 31, 1997. No single client
relationship accounted for more than 3% of Owner's Allocation for the year
ended December 31, 1997.
(3) As defined by Note (2) on page 3.
(4) No Affiliate other than Tweedy, Browne accounted for more than 17% of EBITDA
Contribution for the yearended December 31, 1997.
(5) As defined by Note (2) on page 10.
(6) As defined by Note (3) on page 10.
24
<PAGE>
The table below depicts the pro forma change in the Company's assets under
management (assuming that all Affiliates in which the Company owned an interest
at December 31, 1997 were included for the entire year).
<TABLE>
<CAPTION>
PRO FORMA CHANGE IN ASSETS UNDER MANAGEMENT
- --------------------------------------------------------------------------------
YEAR ENDED
DECEMBER
31,
1997
-----------
(IN
MILLIONS)
<S> <C>
Assets under management--beginning.............................................. $ 27,747
Net new sales................................................................... 11,942
Market appreciation............................................................. 5,984
-----------
Assets under management--ending................................................. $ 45,673
-----------
-----------
</TABLE>
HISTORICAL
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company had a net loss after extraordinary item of $8.4 million for the
year ended December 31, 1997 compared to a net loss after extraordinary item of
$2.4 million for the year ended December 31, 1996. The net loss for the year
ended December 31, 1997 resulted primarily from the extraordinary item of $10.0
million, net of related tax benefit, from the early extinguishment of debt.
Before extraordinary item, net income was $1.6 million for the year ended
December 31, 1997 compared to a net loss of $1.4 million for the year ended
December 31, 1996.
Assets under management on a historical basis increased by $26.6 billion to
$45.7 billion at December 31, 1997 from $19.1 billion at December 31, 1996, in
part due to the investments made in Gofen and Glossberg, GeoCapital and Tweedy,
Browne during 1997. Excluding the initial assets under management of these
Affiliates at the respective dates of the Company's investments, assets under
management increased by $15.8 billion as a result of $4.6 billion in market
appreciation and $11.2 billion from positive net client cash flows.
Total revenues for the year ended December 31, 1997 were $95.3 million, an
increase of $44.9 million or 89% over the year ended December 31, 1996. The
Company invested in Burridge in December 1996, Gofen and Glossberg in May 1997,
GeoCapital in September 1997 and Tweedy, Browne in October 1997, and included
their results from their respective purchase dates. In addition, the Company
invested in First Quadrant in March 1996 and its results were included in the
results for the year ended December 31, 1996 from its purchase date. Revenues
from these investments accounted for $43.1 million of the increase in revenues
from 1996 to 1997 while revenues from other existing Affiliates increased by
$1.8 million to $26.7 million. Performance-based fees, primarily earned by First
Quadrant, increased by $4.0 million to $17.2 million for the year ended December
31, 1997 compared to $13.2 million for the year ended December 31, 1996.
Compensation and related expenses increased by $20.5 million to $41.6
million for the year ended December 31, 1997 from $21.1 million for the year
ended December 31, 1996. The inclusion of the First Quadrant, Burridge, Gofen
and Glossberg, GeoCapital and Tweedy, Browne investments accounted for $19.3
million of this increase while the remainder of the increase was attributable to
the increased compensation costs of AMG personnel, including the cost of new
hires.
Amortization of intangible assets decreased by $1.5 million to $6.6 million
for the year ended December 31, 1997 from $8.1 million for the year ended
December 31, 1996. Amortization of intangible assets increased by $3.1 million
as a result of the inclusion of the First Quadrant, Burridge, and Gofen and
Glossberg, GeoCapital and Tweedy, Browne investments, which increase was offset
by an impairment loss of $4.6 million taken on the Systematic investment during
1996 with no similar item in 1997.
25
<PAGE>
Selling, general and administrative expenses increased by $8.0 million to
$18.9 million for the year ended December 31, 1997 from $10.9 million for the
year ended December 31, 1996. The First Quadrant, Burridge, Gofen and Glossberg,
GeoCapital and Tweedy, Browne investments accounted for $6.0 million of this
increase and the remainder was primarily due to increases in AMG's and the other
Affiliates' selling, general and administrative expenses.
Other operating expenses increased by approximately $1.3 million to $3.6
million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 1996, primarily due to the results of operations of the new
Affiliates described above.
Minority interest increased by $6.2 million to $12.2 million for the year
ended December 31, 1997 from $6.0 million for the year ended December 31, 1996.
Of this increase, $5.4 million was as a result of the addition of new Affiliates
as described above and the remainder was due to the Owners' Allocation growth at
the Company's existing Affiliates.
Interest expense increased $5.8 million to $8.5 million for the year ended
December 31, 1997 from $2.7 million for the year ended December 31, 1996 as a
result of the increased indebtedness incurred in connection with the investments
described above. See "Liquidity and Capital Resources".
Income tax expense was $1.4 million for the year ended December 31, 1997
compared to $181,000 for the year ended December 31, 1996. The effective tax
rate for the year ended December 31, 1997 was 46% compared to 15% for the year
ended December 31, 1996. The change in effective tax rates from 1996 to 1997 is
related primarily to the change in the provision for federal taxes from 1996 to
1997. In 1996, the Company recorded a federal deferred tax benefit of $233,000
on a pretax loss of $1.2 million. In 1997, the Company recorded a deferred tax
expense of $776,000 on pretax income of $3.0 million. The deferred taxes account
for the effects of temporary differences between the recognition of deductions
for book and tax purposes primarily related to the accelerated amortization of
certain intangible assets.
EBITDA increased by $9.5 million to $20.0 million for the year ended
December 31, 1997 from $10.5 million for the year ended December 31, 1996 as a
result of the inclusion of new Affiliates as described above and revenue growth.
EBITDA as adjusted increased by $2.6 million to $10.2 million for the year
ended December 31, 1997 from $7.6 million for the year ended December 31, 1996
as a result of the factors affecting net income as described above, before
non-cash expenses such as amortization of intangible assets, depreciation and
extraordinary items of $18.6 million for the year ended December 31, 1997 and
$10.0 million for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net loss was $2.4 million for the year ended December 31, 1996 compared to
$2.9 million for the year ended December 31, 1995. The change was a result of
the higher operating income from Affiliates in 1996 which was offset by an
extraordinary item of $983,000 and higher depreciation and amortization,
interest and minority interest expenses resulting from the inclusion of certain
Affiliate results for a full year in 1996 compared to partial periods in 1995
and from the inclusion of First Quadrant's results from its acquisition date in
March 1996.
Assets under management on a historical basis increased by $14.5 billion to
$19.1 billion at December 31, 1996 from $4.6 billion at December 31, 1995,
primarily as a result of the investments made in First Quadrant and Burridge
which were completed in March 1996 and December 1996, respectively. Excluding
the initial assets under management of these Affiliates at their date of
investment, assets under management increased by $2.0 billion as a result of
positive client cash flows of $495.0 million and $1.5 billion in market
appreciation.
Consolidated revenues increased $36.2 million to $50.4 million for the year
ended December 31, 1996 from $14.2 million for the year ended December 31, 1995.
Of this increase, $25.5 million was attributable
26
<PAGE>
to the investment in First Quadrant in March 1996. In addition, for the year
ended December 31, 1996, the results of Systematic, Paradigm, Skyline and
Renaissance were included for the full period. Each of those Affiliates was only
included for a portion of the year ended December 31, 1995. Performance-based
fees increased by $11.8 million to $13.2 million for the year ended December 31,
1996 primarily due to the inclusion of First Quadrant which earned performance
fees of $11.5 million for the period ended December 31, 1996. The Company
completed its investment in Burridge on December 31, 1996.
Compensation and related expenses increased $15.1 million to $21.1 million
for the year ended December 31, 1996 from $6.0 million for the year ended
December 31, 1995. Of this increase, $8.1 million was attributable to the
inclusion of First Quadrant. As noted above, for the year ended December 31,
1996, the expenses of each of Systematic, Skyline and Renaissance were included
for the full period. In addition, $1.1 million was attributable to the increased
compensation costs of AMG personnel, including the cost of new hires.
The amortization of intangible assets increased by $3.9 million to $8.1
million for the year ended December 31, 1996 from $4.2 million for the year
ended December 31, 1995. Of this increase, approximately $700,000 was
attributable to the First Quadrant investment and $1.2 million was due to the
inclusion of the other recently acquired Affiliates for the full period. In the
year ended December 31, 1996, the Company also recognized an impairment loss of
$4.6 million in connection with its investment in Systematic which is included
in amortization of intangible assets. The loss reflects the write down of
Systematic's intangible assets to its net realizable value following a period of
net client asset withdrawals. In the year ended December 31, 1995, AMG also
recognized $2.5 million of impairment loss in connection with its Hartwell
investment following a loss of client assets.
Selling, general and administrative expenses increased from $2.2 million for
the year ended December 31, 1995 to $10.9 million for the year ended December
31, 1996 for the reasons stated above related to the periods of inclusion in the
results of operations of the new Affiliates and due to $1.8 million of higher
selling, general and administrative expenses incurred by AMG relating to its
investment activities.
Other operating expenses increased from $330,000 for the year ended December
31, 1995 to $2.3 million for the year ended December 31, 1996. This $2.0 million
increase was primarily due to the inclusion of operations for the First Quadrant
investment for nine months and the Renaissance investment for a full year in
1996.
Minority interest increased by $3.5 million to $6.0 million for the year
ended December 31, 1996 from $2.5 million for the year ended December 31, 1995,
as a result of the addition of new Affiliates during the year and revenue growth
at the Company's Affiliates.
Interest expense increased from $1.2 million for the year ended December 31,
1995 to $2.7 million for the year ended December 31, 1996. The increase in the
interest expense was due to the incurrence of $16.1 million of average bank
borrowings by the Company in connection with the Systematic, Paradigm, Skyline
and Renaissance transactions and $16.0 million of average bank borrowings
incurred in connection with the 1996 investment in First Quadrant for the nine
months ended December 31, 1996.
Income tax expense was $181,000 for the year ended December 31, 1996
compared to $706,000 for the year ended December 31, 1995. The Company did not
accrue a current provision for federal income taxes in 1996 as a result of its
utilization of net operating loss carryforwards. The net operating loss
carryforwards resulted from prior periods of net losses from operations. The
Company has established a valuation allowance against the resulting net deferred
tax asset. The effective tax rate for the year ended December 31, 1996 was 15%
compared to 32% for the year ended December 31, 1995. The 1995 provision for
taxes included $445,000 for state and local income taxes and $261,000 of federal
income taxes. The federal income tax provision included $201,000 of deferred
taxes for the effects of timing differences between the recognition of
deductions for book and tax purposes primarily related to the accelerated
amortization of certain intangible assets.
27
<PAGE>
EBITDA increased $7.2 million to $10.5 million for the year ended December
31, 1996 from $3.3 million for the year ended December 31, 1995 as a result of
the inclusion of new Affiliates as described above and revenue growth.
EBITDA as adjusted increased by $6.2 million to $7.6 million for the year
ended December 31, 1996 from $1.4 million for the year ended December 31, 1995,
as a result of factors affecting net income as described above before non-cash
charges such as amortization of intangible assets, depreciation and
extraordinary items of $10.0 million for the year ended December 31, 1996 and
$4.3 million for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements primarily through cash generated
by its operating activities, bank borrowings, the issuance by the Company of
equity and debt securities in private placement transactions and the net
proceeds from the sale of 8,625,000 shares of Common Stock in an initial public
offering in November 1997. The Company anticipates that it will use cash flow
from its operating activities to repay debt and to finance its working capital
needs and will use bank borrowings and issue equity and debt securities to
finance future investments in affiliates and working capital. The Company's
principal uses of cash have been to make investments in Affiliates, to retire
indebtedness, and to support the Company's and its Affiliates' operating
activities. The Company expects that its principal use of funds for the
foreseeable future will be for investments in additional affiliates, repayments
of debt, including interest payments on outstanding debt, distributions of the
Owners' Allocation to owners of Affiliates other than AMG, additional
investments in existing Affiliates including upon the exercise of Puts (as
defined elsewhere herein) and for working capital purposes. The Company does not
expect to make commitments for material capital expenditures.
Net cash flow from operating activities was $16.2 million, $6.2 million and
$1.3 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash flow used in investing activities was $327.3 million, $29.2 million
and $37.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Of these amounts, $325.9 million, $25.6 million, and $38.0
million, respectively, were used to make investments in Affiliates.
Net cash flow from financing activities was $327.1 million, $15.7 million
and $46.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The principal sources of cash from financing activities has been
from borrowings under senior credit facilities and subordinated debt, private
placements of the Company's equity securities and the Company's IPO. The uses of
cash from financing activities during these periods were for the repayment of
bank debt, repayment of subordinated debt, repayment of notes issued as purchase
price consideration and for the payment of debt issuance costs.
At December 31, 1997, the Company had cash and cash equivalents of $22.8
million and outstanding borrowings of senior debt under its New Credit Facility,
as defined below, of $159.5 million.
During 1997, the Company made investments in three new Affiliates, Gofen and
Glossberg, GeoCapital and Tweedy, Browne, and made additional investments in two
of its existing Affiliates which required approximately $325.9 million in cash
(including transaction costs). The Company obtained the financing for these
investments pursuant to (i) borrowings under the Credit Facility, (ii)
borrowings of $60 million face amount of Subordinated Bridge Notes (the
"Subordinated Debt") and (iii) $30 million from the issuance of Class C
Convertible Preferred Stock and warrants to purchase Class C Convertible
Preferred Stock (clauses (i)--(iii) collectively, the "Recent Financing"). The
Credit Facility included $200 million in revolving credit and $50 million of
7-year Tranche A and $50 million of 8-year Tranche B term loans.
On November 21, 1997, the Company successfully completed its IPO with the
sale of 8,625,000 shares of Common Stock. The Company received net proceeds of
$187.0 million, after deducting the underwriting
28
<PAGE>
discount and expenses payable by the Company in connection with the offering.
The Company used the proceeds of the offering to retire the Subordinated Debt of
$60 million, the Tranche A term loan of $50 million, the Tranche B term loan of
$50 million, $25.8 million of the revolving credit facility and accrued interest
of $1.2 million.
The Company replaced its Credit Facility with a new credit facility ("New
Credit Facility") during December 1997. The New Credit Facility allows for
borrowings up to $300 million (which may be increased to $400 million upon the
approval of the lenders), bears interest at either LIBOR plus a margin ranging
from 0.50% to 2.25% or the Prime Rate plus a margin ranging up to 1.25% and
matures during December 2002. The Company pays a commitment fee of up to 1/2 of
1% on the daily unused portion of the facility.
The Company's borrowings under the New Credit Facility are collateralized by
pledges of all of its interests in Affiliates (including all interests in
Affiliates which are directly held by the Company, as well as all interests in
Affiliates which are indirectly held by the Company through wholly-owned
subsidiaries), representing substantially all of the Company's assets at
December 31, 1997. The credit agreement (the "Credit Agreement") evidencing the
New Credit Facility contains a number of negative covenants, including those
which prevent the Company and its Affiliates from: (i) incurring additional
indebtedness (with certain enumerated exceptions, including additional
borrowings under the New Credit Facility and borrowings which constitute
Subordinated Indebtedness (as that term is defined in the Credit Agreement)),
(ii) creating any liens or encumbrances on any of their assets (with certain
enumerated exceptions), (iii) selling assets outside the ordinary course of
business or making certain fundamental changes with respect to the Company or
any of its subsidiaries, including a restriction on the Company's ability to
transfer interests in its subsidiaries if, as a result of such transfer, the
Company would own less than 51% of such subsidiary, and (iv) declaring or paying
dividends on the Common Stock of the Company.
The Credit Agreement also requires the Company to comply with certain
financial covenants on an ongoing basis. These include a covenant requiring
minimum stockholders' equity of $36.0 million (plus 85% of net proceeds from
offerings of equity and Subordinated Indebtedness (as such term is defined in
the Credit Agreement) and 50% of quarterly net income (or minus certain
quarterly net losses) after the date of the Credit Agreement); a covenant
requiring that Consolidated EBITDA (as such term is defined in the Credit
Agreement) exceed interest expense by 2.0 to 1.0; and a covenant requiring that
senior debt not exceed adjusted EBITDA (as such term is defined in the Credit
Agreement) by more than 5.0 to 1.0. The Company remains in compliance with each
of the foregoing financial covenants. The Company's ability to borrow under the
Credit Agreement is conditioned upon its compliance with the requirements of
that agreement, and any non-compliance with those requirements could give rise
to a default entitling the lenders to accelerate all outstanding borrowings
under that agreement.
In August 1997, the Company issued to Chase Equity Associates 5,333
(pre-split) shares of Series C-2 Non-Voting Convertible Preferred Stock and
warrants to purchase at nominal cost 28,000 (pre-split) shares of Series C-2
Non-Voting Convertible Preferred Stock for aggregate cash consideration of $30.0
million. As partial consideration in the GeoCapital investment, the Company
issued 10,667 (pre-split) shares of Class D Convertible Preferred Stock valued
at $9.6 million.
On March 20, 1998, the Company acquired a majority interest in Essex
Investment Management, LLC. The Company paid $69.6 million in cash and the
assumption of debt, in addition to 1,750,942 newly-issued shares of Class C
Convertible Non-Voting Stock. The stock will automatically convert into AMG
Common Stock at a 1-for-1 exchange ratio after one year. The Company funded the
cash portion of this investment with borrowings under its New Credit Facility.
In order to provide the funds necessary for the Company to continue to
acquire interests in investment management firms, including its Affiliates upon
the exercise of Puts, it will be necessary for the Company to incur, from time
to time, additional long-term bank debt and/or issue equity or debt securities,
29
<PAGE>
depending on market and other conditions. There can be no assurance that such
additional financing will be available or become available on terms acceptable
to the Company.
INTEREST RATE SENSITIVITY
The Company's revenues are derived almost exclusively from fees which are
based on the value of assets under management. Such values are affected by
changes in the broader financial markets which are, in part, affected by
changing interest rates. The Company cannot predict the effects that interest
rates or changes in interest rates may have on either the broader financial
markets or its Affiliates' assets under management and associated fees.
With respect to its debt financings, the Company is exposed to potential
fluctuations in the amount of interest expense resulting from changing interest
rates. The Company seeks to offset such exposure in part by entering into
interest rate hedging contracts. See "Interest Rate Hedging Contracts" below.
The Company's annual interest expense increases or decreases by $199,375 for
each 1/8 of 1% change in interest rates assuming LIBOR is between 5% and 6.78%
and assuming current interest rate margins on bank debt.
INTEREST RATE HEDGING CONTRACTS
The Company seeks to offset its exposure under its debt financing
arrangements to changing interest rates by entering into interest rate hedging
contracts. The Company generally borrows at a floating rate equal to LIBOR plus
a margin as described above. As of December 31, 1997, the Company is a party,
with two major commercial banks as counterparties, to $185 million notional
amount of swap contracts which are designed to limit interest rate increases on
the Company's borrowings. The swap contracts, upon quarterly reset dates, cap
interest rates on the notional amounts when LIBOR exceeds 6.67% or 6.78%. When
LIBOR is at or below 5%, the Company's floating LIBOR-based interest rate debt
is swapped for fixed rate debt at rates ranging between 6.67% and 6.78%. The
hedging contracts limit the effects of the Company's payment of interest at
equivalent LIBOR rates of 6.78% or less on up to $185 million of indebtedness.
However, there can be no assurance that the Company will continue to maintain
such hedging contracts at their existing levels of coverage or that the amount
of coverage maintained will cover all of the Company's indebtedness outstanding
at any such time. In addition, as noted above, the Company's existing hedging
contracts subject the Company to the risk of payments of higher interest rates
when prevailing LIBOR rates are at 5% or less. Therefore, there can be no
assurance that the hedging contracts will meet their overall objective of
reducing the Company's interest expense. In addition, there can be no assurance
that the Company will be successful in obtaining hedging contracts in the future
on any new indebtedness.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
or its Affiliates' computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that the Year 2000
Issue will not have a significant impact on its own systems. The Company has
communicated with its Affiliates and plans to initiate a formal communication
with all of its significant vendors to determine the extent to which the Company
is vulnerable to those third parties who fail to remediate their own Year 2000
Issue.
30
<PAGE>
At this time, the Company's assessment of the impact of the Year 2000 Issue
is incomplete. The Company's assessment is expected to be completed during 1998,
when all of its Affiliates and significant vendors have completed their
individual assessments of the issue.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This standard requires that comprehensive income and its components be
reported and displayed in a financial statement with the same prominence as
other financial statements. Comprehensive income includes net income, as well as
certain items that are recorded directly in stockholders' equity, such as
foreign currency translation adjustments. This standard is effective for years
beginning after December 15, 1997, and will not have a material impact on the
Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This standard requires disclosure of
financial and descriptive information about an entity's reportable operating
segments. Segments are defined by the standard as components of an entity that
engage in business activities that generate revenues and expenses, and for which
separate financial information should be reported on the basis that is used
internally for senior management review. This standard is effective for
financial statements for periods beginning after December 15, 1997, with
restatement of comparative information for prior periods. The Company is
currently evaluating the impact of this standard on its disclosures.
ECONOMIC AND MARKET CONDITIONS
The financial markets and the investment management industry in general have
experienced record performance and record growth in recent years. For example,
between January 1, 1995 and December 31, 1997, the S&P 500 Index appreciated at
a compound annual rate in excess of 31.2% while, according to the Federal
Reserve Board and the Investment Company Institute, aggregate assets under
management of mutual and pension funds grew at a compound annual rate
approaching 20% for the period January 1, 1995 to December 31, 1996. The
financial markets and businesses operating in the securities industry, however,
are highly volatile and are directly affected by, among other factors, domestic
and foreign economic conditions and general trends in business and finance, all
of which are beyond the control of the Company. There can be no assurance that
broader market performance will be favorable in the future. Any decline in the
financial markets or a lack of sustained growth may result in a corresponding
decline in performance by the Affiliates and may adversely affect assets under
management and/or fees at the Affiliate level, which would reduce cash flow
distributions to the Company.
INTERNATIONAL OPERATIONS
First Quadrant Limited is organized and headquartered in London, England.
Tweedy, Browne, based in New York, also maintains a research office in London.
In the future, the Company may seek to invest in other investment management
firms which are located and/or conduct a significant part of their operations
outside of the United States. There are certain risks inherent in doing business
internationally, such as changes in applicable laws and regulatory requirements,
difficulties in staffing and managing foreign operations, longer payment cycles,
difficulties in collecting investment advisory fees receivable, political
instability, fluctuations in currency exchange rates, expatriation controls and
potential adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on First Quadrant
Limited or other non-U.S. investment management firms in which the Company may
invest in the future and, consequently, on the Company's business, financial
condition and results of operations.
INFLATION
The Company does not believe that inflation or changing prices have had a
material impact on its results of operations.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Affiliated Managers Group, Inc.:
We have audited the accompanying consolidated balance sheets of Affiliated
Managers Group, Inc. and Affiliates as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Affiliated
Managers Group, Inc. and Affiliates as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 10, 1998
except for Note 16
for which the date is
March 20, 1998.
32
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 6,767 $ 22,766
Investment advisory fees receivable..................................................... 15,491 27,061
Other current assets.................................................................... 806 2,231
---------- ----------
Total current assets.................................................................. 23,064 52,058
Fixed assets, net......................................................................... 2,999 4,724
Equity investment in Affiliate............................................................ 1,032 1,237
Acquired client relationships, net of accumulated amortization of $2,979 in 1996 and
$6,142 in 1997.......................................................................... 30,663 142,875
Goodwill, net of accumulated amortization of $10,022 in 1996 and $13,502 in 1997.......... 40,809 249,698
Other assets.............................................................................. 2,768 6,398
---------- ----------
Total assets.......................................................................... $ 101,335 $ 456,990
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................................ $ 16,212 $ 18,815
Notes payable to related parties........................................................ 7,379 --
---------- ----------
Total current liabilities............................................................. 23,591 18,815
Senior bank debt.......................................................................... 33,400 159,500
Accrued affiliate liability............................................................... 3,200 --
Other long-term liabilities............................................................... 665 1,656
Subordinated debt......................................................................... -- 800
---------- ----------
Total liabilities..................................................................... 60,856 180,771
Minority interest......................................................................... 3,490 16,479
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................................................... 42,476 --
Common stock.............................................................................. -- 177
Additional paid-in capital on common stock................................................ 5 273,475
Foreign translation adjustment............................................................ 22 (30)
Accumulated deficit....................................................................... (5,514) (13,882)
---------- ----------
Total stockholders' equity............................................................ 36,989 259,740
---------- ----------
Total liabilities and stockholders' equity............................................ $ 101,335 $ 456,990
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................................... $ 14,182 $ 50,384 $ 95,287
Operating expenses:
Compensation and related expenses........................................ 6,018 21,113 41,619
Amortization of intangible assets........................................ 4,174 8,053 6,643
Depreciation and other amortization...................................... 133 932 1,915
Selling, general and administrative...................................... 2,237 10,854 18,912
Other operating expenses................................................. 330 2,261 3,637
---------- ---------- ----------
12,892 43,213 72,726
---------- ---------- ----------
Operating income....................................................... 1,290 7,171 22,561
Non-operating (income) and expenses:
Investment and other income.............................................. (265) (337) (1,174)
Interest expense......................................................... 1,244 2,747 8,479
---------- ---------- ----------
979 2,410 7,305
---------- ---------- ----------
Income before minority interest, income taxes and extraordinary item....... 311 4,761 15,256
Minority interest.......................................................... (2,541) (5,969) (12,249)
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item................... (2,230) (1,208) 3,007
Income taxes............................................................... 706 181 1,364
---------- ---------- ----------
Income (loss) before extraordinary item.................................... (2,936) (1,389) 1,643
---------- ---------- ----------
Extraordinary item, net.................................................... -- (983) (10,011)
---------- ---------- ----------
Net (loss)................................................................. $ (2,936) $ (2,372) $ (8,368)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per share--basic:
Income (loss) before extraordinary item................................ $ (2.95) $ (3.22) $ 0.72
Extraordinary item, net................................................ -- (2.27) (4.41)
---------- ---------- ----------
Net (loss)............................................................. $ (2.95) $ (5.49) $ (3.69)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per share--diluted:
Income (loss) before extraordinary item................................ $ (2.95) $ (3.22) $ 0.20
Extraordinary item, net................................................ -- (2.27) (1.22)
---------- ---------- ----------
Net (loss)............................................................. $ (2.95) $ (5.49) $ (1.02)
---------- ---------- ----------
---------- ---------- ----------
Average shares outstanding--basic.......................................... 996,144 431,908 2,270,684
Average shares outstanding--diluted........................................ 996,144 431,908 8,235,529
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net (loss).......................................................................... $ (2,936) (2,372) $ (8,368)
Adjustments to reconcile net (loss) to net cash flow from operating activities:
Amortization of intangible assets................................................. 4,174 8,053 6,643
Extraordinary item................................................................ -- 983 10,011
Minority interest................................................................. 631 2,309 13,108
Depreciation and other amortization............................................... 133 932 1,915
Increase (decrease) in deferred income taxes...................................... 141 (215) --
Changes in assets and liabilities:
Increase in investment advisory fees receivable................................... (186) (8,473) (3,980)
Increase in other current assets.................................................. (397) (1,881) (977)
Increase (decrease) in accounts payable, accrued expenses and other liabilities... (268) 6,849 (2,147)
--------- --------- ---------
Cash flow from operating activities............................................... 1,292 6,185 16,205
--------- --------- ---------
Cash flow used in investing activities:
Purchase of fixed assets............................................................ (287) (922) (1,648)
Costs of investments, net of cash acquired.......................................... (38,031) (25,646) (325,896)
Sale of investment.................................................................. -- 642 --
Distributions received from Affiliate equity investment............................. -- 275 229
Increase (decrease) in other assets................................................. 216 (3,639) 40
Repayment on notes recorded in purchase of business................................. 321 80 --
--------- --------- ---------
Cash flow used in investing activities............................................ (37,781) (29,210) (327,275)
--------- --------- ---------
Cash flow from financing activities:
Borrowings of senior bank debt...................................................... 28,400 21,000 303,900
Repayments of senior bank debt...................................................... (10,000) (6,000) (177,800)
Repayments of notes payable......................................................... (962) (1,212) (5,878)
Borrowings of subordinated bank debt................................................ -- -- 58,800
Repayments of subordinated bank debt................................................ -- -- (60,000)
Issuances of equity securities...................................................... 20,000 2,485 217,021
Issuance of warrants................................................................ -- -- 1,200
Payment of subscription receivable.................................................. 10,000 -- --
Repurchase of preferred stock....................................................... -- (13) --
Debt issuance costs................................................................. (1,024) (610) (10,131)
--------- --------- ---------
Cash flow from financing activities............................................... 46,414 15,650 327,112
Effect of foreign exchange rate changes on cash flow.................................. -- 46 (43)
Net increase (decrease) in cash and cash equivalents.................................. 9,925 (7,329) 15,999
Cash and cash equivalents at beginning of year........................................ 4,171 14,096 6,767
--------- --------- ---------
Cash and cash equivalents at end of year.............................................. $ 14,096 $ 6,767 $ 22,766
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid....................................................................... $ 1,005 $ 2,905 $ 8,559
Income taxes paid................................................................... 696 436 256
Supplemental disclosure of non-cash investing activities:
Increase (decrease) in liabilities related to acquisitions.......................... 3,200 -- (3,200)
Supplemental disclosure of non-cash financing activities:
Preferred stock issued in acquisitions.............................................. -- -- 11,101
Common stock issued in exchange for Affiliate equity interests...................... -- -- 1,849
Notes issued in acquisitions........................................................ -- 6,686 --
Conversion of preferred stock to common stock....................................... -- -- 83,576
Exchange of common stock for preferred stock........................................ 10,004 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL
PREFERRED COMMON PREFERRED COMMON PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES SHARES STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT EQUITY
----------- --------- ----------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994......... 40,000 2,550,000 $ 10,004 $ -- $ 5 $ -- $ (206) $ 9,803
Issuance of common stock.. -- 275,000 -- -- -- -- -- --
Payment of subscription
receivable.............. -- -- -- -- 10,000 -- -- 10,000
Exchange of common stock
for preferred stock..... 40,000 (2,000,000) 10,004 -- (10,004) -- -- --
Issuance of preferred
stock................... 29,851 -- 20,000 -- -- -- -- 20,000
Net loss.................. -- -- -- -- -- -- (2,936) (2,936)
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1995......... 109,851 825,000 40,008 -- 1 -- (3,142) 36,867
Issuance of common stock.. -- 162,500 -- -- 4 -- -- 4
Issuance of preferred
stock................... 3,703 -- 2,481 -- -- -- -- 2,481
Repurchase of preferred
stock................... (20) -- (13) -- -- -- -- (13)
Net loss.................. -- -- -- -- -- -- (2,372) (2,372)
Foreign translation
adjustment.............. -- -- -- -- -- 22 -- 22
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1996......... 113,534 987,500 42,476 -- 5 22 (5,514) 36,989
Issuance of common stock.. -- 8,753,667 -- 98 188,773 -- -- 188,871
Issuance of preferred
stock and warrants...... 45,715 -- 41,100 -- 1,200 -- -- 42,300
Conversion of preferred
stock................... (159,249) 7,962,450 (83,576) 79 83,497 -- -- --
Net loss.................. -- -- -- -- -- -- (8,368) (8,368)
Foreign translation
adjustment.............. -- -- -- -- -- (52) -- (52)
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1997......... -- 17,703,617 $ -- $ 177 $ 273,475 $ (30) $ (13,882) $ 259,740
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
The principal business activity of Affiliated Managers Group, Inc. ("AMG" or
the "Company") is the acquisition of equity interests in investment management
firms ("Affiliates"). AMG's Affiliates operate in one industry segment, that of
providing investment management services, primarily in the United States and
Europe, to mutual funds, partnerships and institutional and individual clients.
Affiliates are either organized as limited partnerships, general
partnerships or limited liability companies. AMG has contractual arrangements
with each Affiliate whereby a percentage of revenues is allocable to fund
Affiliate operating expenses, including compensation (the Operating Allocation),
while the remaining portion of revenues (the Owners' Allocation) is allocable to
AMG and the other partners or members, generally with a priority to AMG.
Affiliate operations are consolidated in these financial statements. The portion
of the Owners' Allocation allocated to owners other than AMG is included in
minority interest in the statement of operations. Minority interest on the
consolidated balance sheets includes undistributed Owners' Allocation and
Operating Allocation and capital owned by owners other than AMG.
CONSOLIDATION
These consolidated financial statements include the accounts of AMG and each
Affiliate in which AMG has a controlling interest. In each such instance, AMG
is, directly or indirectly, the sole general partner (in the case of Affiliates
which are limited partnerships), sole managing general partner (in the case of
the Affiliate which is a general partnership) or sole manager member (in the
case of Affiliates which are limited liability companies). Investments where AMG
does not hold a controlling interest are accounted for under the equity method
of accounting and AMG's portion of net income is included in investment and
other income. All intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company's consolidated revenues represent advisory fees billed quarterly
and annually by Affiliates for managing the assets of clients. Asset-based
advisory fees are recognized monthly as services are rendered and are based upon
a percentage of the market value of client assets managed. Any fees collected in
advance are deferred and recognized as income over the period earned.
Performance-based advisory fees are recognized when earned based upon either the
positive difference between the investment returns on a client's portfolio
compared to a benchmark index or indices, or an absolute percentage of gain in
the client's account, and are accrued in amounts expected to be realized.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value due to the short-term maturity of these
investments.
FIXED ASSETS
Equipment and other fixed assets are recorded at cost and depreciated using
the straight-line method over their estimated useful lives ranging from three to
five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease.
ACQUIRED CLIENT RELATIONSHIPS AND GOODWILL
The purchase price for the acquisition of interests in Affiliates is
allocated based on the fair value of assets acquired, primarily acquired client
relationships. In determining the allocation of purchase price to acquired
client relationships, the Company analyzes the net present value of each
acquired Affiliate's existing client relationships based on a number of factors
including: the Affiliate's historical and potential
37
<PAGE>
future operating performance; the Affiliate's historical and potential future
rates of attrition among existing clients; the stability and longevity of
existing client relationships; the Affiliate's recent, as well as long-term,
investment performance; the characteristics of the firm's products and
investment styles; the stability and depth of the Affiliate's management team,
and the Affiliate's history and perceived franchise or brand value. The cost
assigned to acquired client relationships is amortized using the straight line
method over periods ranging from nine to 26 years. The expected useful lives of
acquired client relationships are analyzed separately for each acquired
Affiliate and determined based on an analysis of the historical and potential
future attrition rates of each Affiliate's existing clients, as well as a
consideration of the specific attributes of the business of each Affiliate.
The excess of purchase price for the acquisition of interests in Affiliates
over the fair value of net assets acquired, including acquired client
relationships, is classified as goodwill. Goodwill is amortized using the
straight-line method over periods ranging from 15 to 35 years. In determining
the amortization period for goodwill, the Company considers a number of factors
including: the firm's historical and potential future operating performance; the
characteristics of the firm's clients, products and investment styles; as well
as the firm's history and perceived franchise or brand value. Unamortized
intangible assets, including acquired client relationships and goodwill, are
periodically re-evaluated and if experience subsequent to the acquisition
indicates that there has been an impairment in value, other than temporary
fluctuations, an impairment loss is recognized. Management evaluates the
recoverability of unamortized intangible assets quarterly for each acquisition
using estimates of undiscounted cash flows factoring in known or expected
trends, future prospects and other relevant information. If impairment is
indicated, the Company measures its loss as the excess of the carrying value of
the intangible assets for each Affiliate over its fair value determined using
valuation models such as discounted cash flows and market comparables. Included
in amortization expense for 1996 and 1995 are impairment losses of $4,628 and
$2,500, respectively, relating to two of AMG's Affiliates following periods of
significant client asset withdrawals. Fair value in such cases was determined
using market comparables based on revenues, cash flow and assets under
management. No impairment loss was recorded for the year ended December 31,
1997.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility.
Unamortized debt issuance costs of $983 and $10,011, net of taxes, were written
off as an extraordinary item in 1996 and 1997, respectively, as part of the
Company's replacement of its previous credit facilities with new facilities.
INTEREST-RATE HEDGING AGREEMENTS
The Company periodically enters into interest-rate hedging agreements to
hedge against potential increases in interest rates on the Company's outstanding
borrowings. The Company's policy is to accrue amounts receivable or payable
under such agreements as reductions or increases in interest expense,
respectively.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
("FAS 109") which requires the use of the asset and liability approach for
accounting for income taxes. Under FAS 109, the Company recognizes deferred tax
assets and liabilities for the expected consequences of temporary differences
between the financial statement amount and tax basis of the Company's assets and
liabilities. A deferred tax valuation allowance is established if, in
management's opinion, it is more likely than not that all or a portion of the
Company's deferred tax assets will not be realized.
38
<PAGE>
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of non-U.S. based Affiliates are translated into
U.S. dollars at the exchange rates in effect as of the balance sheet date.
Revenues and expenses are translated at the average monthly exchange rates then
in effect.
PUTS AND CALLS
As further described in Note 11, the Company periodically purchases
additional equity interests in Affiliates from minority interest owners (prior
shareholders of acquired Affiliates). Resulting payments made to such owners are
considered purchase price for such acquired interests. The estimated cost of
purchases from equity holders who have been awarded equity interests in
connection with their employment is accrued, net of estimated forfeitures, over
the service period as equity-based compensation.
EQUITY-BASED COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This standard became effective January 1, 1996. The
standard encourages, but does not require, adoption of a fair value-based
accounting method for stock-based compensation arrangements which includes stock
option grants, sales of restricted stock and grants of equity-based interests in
Affiliates to certain limited partners or members. An entity may continue to
apply Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations, provided the entity discloses its pro forma net income and
earnings per share as if the fair value based method had been applied in
measuring compensation cost. The Company continues to apply APB 25 and related
interpretations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts included in the financial
statements and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
2. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
investment advisory fees receivable. The Company maintains cash and cash
equivalents, short-term investments and certain off-balance-sheet financial
instruments with various financial institutions. These financial institutions
are located in places where AMG and its Affiliates operate. For AMG and certain
Affiliates, cash deposits at a financial institution may exceed FDIC insurance
limits.
Substantially all of the Company's revenues are derived from the investment
management operations of its Affiliates. For the year ended December 31, 1997,
one of those Affiliates accounted for approximately 33% of AMG's share of total
Owners' Allocation.
39
<PAGE>
3. FIXED ASSETS AND LEASE COMMITMENTS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Office equipment..................................................................... $ 2,614 $ 5,870
Furniture and fixtures............................................................... 1,677 3,530
Leasehold improvements............................................................... 538 2,007
Computer software.................................................................... 184 760
--------- ---------
Total fixed assets............................................................... 5,013 12,167
--------- ---------
Accumulated depreciation............................................................. (2,014) (7,443)
--------- ---------
Fixed assets, net................................................................ $ 2,999 $ 4,724
--------- ---------
--------- ---------
</TABLE>
The Company and its Affiliates lease computer equipment and office space for
their operations. At December 31, 1997, the Company's aggregate future minimal
rentals for operating leases having initial or noncancelable lease terms greater
than one year are payable as follows:
<TABLE>
<CAPTION>
REQUIRED
MINIMUM
YEAR ENDING DECEMBER 31, PAYMENTS
- --------------------------------------------------------------------------------------------- -----------
<S> <C>
1998......................................................................................... $ 3,091
1999......................................................................................... 2,735
2000......................................................................................... 2,413
2001......................................................................................... 2,094
2002......................................................................................... 2,603
Thereafter................................................................................... 4,547
</TABLE>
Consolidated rent expense for 1995, 1996 and 1997 was $493, $2,359 and
$3,637, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Accounts payable.................................................................. $ 396 $ 940
Accrued compensation.............................................................. 9,264 6,480
Accrued rent...................................................................... 3,509 2,769
Deferred revenue.................................................................. 796 1,481
Accrued professional services..................................................... 1,350 2,552
Other............................................................................. 897 4,593
--------- ---------
$ 16,212 $ 18,815
--------- ---------
--------- ---------
</TABLE>
5. RETIREMENT PLANS
AMG has a defined contribution retirement plan covering substantially all of
its full-time employees and four of its Affiliates. Six of AMG's other
Affiliates have separate defined contribution retirement plans. Under each of
the plans, AMG and each Affiliate is able to make discretionary contributions to
qualified plan participants up to IRS limits. Consolidated expenses related to
these plans in 1995, 1996 and 1997 were $222, $656 and $1,020, respectively.
40
<PAGE>
6. SENIOR BANK DEBT AND SUBORDINATED DEBT
In December 1997, the Company replaced its $300 million revolving Credit
Facility with a new $300 million revolving credit facility ("New Credit
Facility"), with principal repayment due in December 2002. Interest is payable
at rates up to 1.25% over the Prime Rate or up to 2.25% over LIBOR on amounts
borrowed. The Company pays a commitment fee of up to 1/2 of 1% on the daily
unused portion of the facility. The Company had $159.5 million outstanding on
the New Credit Facility at December 31, 1997.
The effective interest rates on the outstanding borrowings were 6.5% and
7.2% at December 31, 1996 and 1997, respectively. All borrowings under the New
Credit Facility are collateralized by pledges of all capital stock or other
equity interests in each AMG Affiliate owned or to be acquired. The credit
agreement contains certain financial covenants which require the Company to
maintain specified minimum levels of net worth and interest coverage ratios and
maximum levels of indebtedness, all as defined in the credit agreement. The
credit agreement also limits the Company's ability to pay dividends and incur
additional indebtedness.
As of December 31, 1997, the Company is a party, with two major commercial
banks as counterparties, to $185 million notional amount of swap contracts which
are designed to limit interest rate increases on the Company's LIBOR-based
borrowings. The swap contracts, upon quarterly reset dates, cap interest rates
on the notional amounts at rates ranging between 6.67% and 6.78%. When LIBOR is
at or below 5%, the Company's floating rate LIBOR debt is swapped for fixed rate
debt at rates ranging between 6.67% and 6.78%. The hedging contracts limit the
effects of the Company's payments of interest at equivalent LIBOR rates of 6.78%
or less on up to $185 million of indebtedness. The contracts mature between
March 2001 and October 2002.
One of the Company's Affiliates also operates as a broker-dealer and must
maintain specified minimum amounts of "net capital" as defined in SEC Rule
15c3-1. In connection with this requirement, the Affiliate has $800 of
subordinated indebtedness which qualifies as net capital under the net capital
rule. The subordinated indebtedness is subordinated to claims of general
creditors and is secured by notes and marketable securities of certain of the
Affiliate's management members.
7. INCOME TAXES
A summary of the provision for income taxes, before the 1997 tax benefit of
$846 related to the extraordinary item, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current............................................................................... $ 60 $ -- $ --
Deferred.............................................................................. 201 (233) 776
State:
Current............................................................................... 514 397 352
Deferred.............................................................................. (69) 17 236
--------- --------- ---------
Provision for income taxes.............................................................. $ 706 $ 181 $ 1,364
--------- --------- ---------
--------- --------- ---------
</TABLE>
41
<PAGE>
The effective income tax rate differs from the amount computed on "income
(loss) before extraordinary item" by applying the U.S. federal income tax rate
because of the effect of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax at U.S. federal income tax rate............................................... (35)% (35)% 35%
Nondeductible expenses, primarily amortization of intangibles..................... 54 21 15
State income taxes, net of federal benefit........................................ 13 23 13
Valuation allowance............................................................... -- 6 (17)
--- --- ---
32% 15% 46%
--- --- ---
--- --- ---
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred assets (liabilities):
Net operating loss carryforwards................................................. $ 3,481 $ 10,436
Intangible amortization.......................................................... (4,950) (9,238)
Accrued compensation............................................................. 2,004 849
Other, net....................................................................... (58) (58)
--------- ---------
477 1,989
--------- ---------
Valuation allowance................................................................ (477) (1,989)
--------- ---------
Net deferred income taxes.......................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997, the Company had tax net operating loss ("NOL")
carryforwards of approximately $25 million which expire beginning in the year
2010. Realization is dependent on generating sufficient taxable income prior to
expiration of the tax loss carryforwards. At December 31, 1997, management
believed it was more likely than not that the Company's deferred tax asset of
$1,989, arising primarily from NOL carryforwards, would not be realized and
accordingly established a full valuation allowance against the asset. The
Company will review the valuation allowance at the end of each reporting period
and will make adjustments if it is determined that it is more likely than not
that the NOL's will be realized.
8. CONTINGENCIES
The Company and its Affiliates are subject to claims, legal proceedings and
other contingencies in the ordinary course of their business activities. Each of
these matters is subject to various uncertainties, and it is possible that some
of these matters may be resolved unfavorably to the Company or its Affiliates.
The Company and its Affiliates establish accruals for matters that are probable
and can be reasonably estimated. Management believes that any liability in
excess of these accruals upon the ultimate resolution of these matters will not
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
9. ACQUISITIONS AND COMMITMENTS
1997
During 1997, the Company acquired in purchase transactions majority
interests in Gofen and Glossberg, GeoCapital and Tweedy, Browne. The Company
also acquired additional interests in two of its existing Affiliates.
42
<PAGE>
The Company issued 10,667 shares of Class D Convertible Preferred Stock
valued at $9.6 million as partial consideration in the GeoCapital transaction.
The preferred stock was exchanged for 533,350 shares of the Company's Common
Stock in connection with the Company's initial public offering.
The results of operations of Gofen and Glossberg, GeoCapital and Tweedy,
Browne are included in the consolidated results of operations of the Company
from their respective dates of acquisition, May 7, 1997, September 30, 1997 and
October 9, 1997.
1996
During 1996, the Company acquired in purchase transactions majority
interests in First Quadrant and Burridge. In addition, the Company acquired
additional partnership interests from limited partners of two of its existing
Affiliates.
On December 31, 1996, the Company issued notes in the amount of $6.7 million
as partial consideration in the purchase to Burridge selling shareholders who
remained as employees. On January 3, 1997, the notes were settled in cash for
$5.2 million and the issuance of 1,715 shares of Series B-1 Voting Convertible
Preferred Stock. The Convertible Preferred Stock was subsequently exchanged for
85,750 shares of Common Stock in connection with the Company's initial public
offering.
The results of operations of First Quadrant and Burridge are included in the
consolidated results of operations of the Company from their respective dates of
acquisition, March 28, 1996 and December 31, 1996.
1995
During 1995, the Company acquired in purchase transactions majority
interests in Systematic, Skyline and Renaissance. The Company also made a
minority investment in Paradigm. In connection with an Affiliate acquisition,
the Company assumed an unconditional $3.2 million purchase obligation on the
equity interests of limited partners which would be settled in either cash or
the Company's stock. During 1997, the partners in that affiliate exchanged this
unconditional right for new equity interests in this Affiliate.
The results of operations of Systematic, Skyline and Renaissance are
included in the consolidated results of operations of the Company from their
respective dates of investment, May 16, 1995, August 31, 1995, and November 9,
1995. The net income associated with the Company's minority interest in Paradigm
is included in the consolidated results of operations of the Company using the
equity method from May 22, 1995, the date of investment.
The total purchase price, including cash, notes, common and preferred stock
and capitalized transaction costs, associated with these investments, is
allocated as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Allocation of Purchase Price:
Net tangible assets................................................. $ 1,720 $ 2,198 $ 5,924
Intangible assets................................................... 39,800 35,040 331,421
Minority investment................................................. 888 -- --
--------- --------- ----------
Total purchase price.............................................. $ 42,408 $ 37,238 $ 337,345
--------- --------- ----------
--------- --------- ----------
</TABLE>
Unaudited pro forma data for the years ended December 31, 1996 and 1997 are
set forth below, giving consideration to the acquisitions occurring in the
respective two-year period, as if such transactions occurred as of the beginning
of 1996, assuming revenue sharing arrangements had been in effect for the
43
<PAGE>
entire period and after making certain other pro forma adjustments. This pro
forma data has been prepared following Accounting Principles Board Opinion No.
16 ("APB 16").
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Revenues..................................................................... $ 120,999 $ 147,159
Income before extraordinary item............................................. 1,366 7,230
Extraordinary item, net...................................................... (584) (6,141)
Net income................................................................... 782 1,089
Income before extraordinary item per share--basic............................ $ 0.08 $ 0.41
Income before extraordinary item per share--diluted.......................... 0.08 0.41
Net income per share--basic.................................................. 0.04 0.06
Net income per share--diluted................................................ 0.04 0.06
</TABLE>
In conjunction with certain acquisitions, the Company has entered into
agreements and is contingently liable, upon achievement of specified revenue
targets over a five-year period, beginning with the date of AMG's investment, to
make additional purchase payments of up to $23 million plus interest as
applicable. These contingent payments, if achieved, will be settled for cash
with most coming due beginning January 1, 2001 and January 1, 2002 and will be
accounted for as an adjustment to the purchase price of the Affiliate. In
addition, subject to achievement of performance goals, certain key Affiliate
employees have options to receive additional equity interests in their
Affiliates.
Related to one of the Company's Affiliates, a former institutional
shareholder is entitled to redeem a cash value warrant on April 30, 1999. Using
the actual results of operations of this Affiliate to date, the cash value
warrant had no value and, therefore, no amounts have been accrued in these
financial statements.
10. EQUITY INVESTMENT
In 1995, the Company purchased a 30% equity interest in Paradigm, which is
accounted for under the equity method of accounting.
Summarized financial information for Paradigm is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Balance Sheet Data:
Current assets....................................................................... $ 756 $ 965
Non current assets................................................................... 492 513
--------- ---------
Total assets..................................................................... $ 1,248 $ 1,478
--------- ---------
--------- ---------
Current liabilities.................................................................. $ 493 $ 416
Non current liabilities.............................................................. -- --
--------- ---------
Total liabilities................................................................ $ 493 $ 416
--------- ---------
--------- ---------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 22, 1995 FOR THE FOR THE
(DATE OF ACQUISITION) YEAR ENDED YEAR ENDED
TO DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ----------------- -----------------
<S> <C> <C> <C>
Statement of Earnings Data:
Total revenues.............................. $ 894 $ 2,051 $ 3,078
Operating and other expenses................ 840 1,488 2,630
----- ------ ------
Net Income.................................. $ 54 $ 563 $ 448
----- ------ ------
----- ------ ------
</TABLE>
11. PUTS AND CALLS
To ensure the availability of continued ownership participation to future
key employees, the Company has options to repurchase ("Calls") certain equity
interests in Affiliates owned by partners or members. The options were
exercisable beginning in 1997. In addition, Affiliate management owners have
options ("Puts"), exercisable beginning in the year 2000, which require the
Company to purchase certain portions of their equity interests at staged
intervals. The Company is also obligated to purchase ("Purchase") such equity
interests in Affiliates upon death, disability or termination of employment. All
of the Puts and Purchases would take place based on a multiple of the respective
Affiliate's Owners' Allocation but using reduced multiples for terminations for
cause or for voluntary terminations occurring prior to agreed upon dates, all as
defined in the general partnership, limited partnership or limited liability
company agreements of the Affiliates. Resulting payments made to former owners
of acquired Affiliates are accounted for as adjustments to the purchase price
for such Affiliates. Payments made to equity holders who have been awarded
equity interests in connection with their employment are accrued, net of
estimated forfeitures, over the service period as equity-based compensation.
The Company's contingent obligations under the Put and Purchase arrangements
at December 31, 1997 ranged from $5.3 million on the one hand, assuming all such
obligations occur due to early terminations or terminations for cause, and
$145.3 million on the other hand, assuming all such obligations occur due to
death, disability or terminations without cause. The Put and Purchase amounts
above were calculated based upon $20.1 million of average annual historical
Owners' Allocation. Assuming the closing of all such Put and Purchase
transactions, AMG would own all the prospective Owners' Allocations.
12. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company had 43,000,000 authorized shares of Common Stock (including
Class B Common Stock) with a par value of $.01 per share of which 987,500 and
17,703,617 shares were issued and outstanding at December 31, 1996 and 1997,
respectively.
INITIAL PUBLIC OFFERING
On November 21, 1997, the Company completed an initial public offering
("IPO"), issuing 8,625,000 shares of Common Stock. In November 1997, the Company
also issued 78,667 shares of Common Stock to limited partners of an Affiliate in
return for equity interests in that Affiliate.
The Company's Board of Directors authorized a 50-for-1 stock split effected
in the form of a stock dividend on the Company's authorized and outstanding
Common Stock. The stock dividend was effective immediately prior to the
Company's IPO. Where applicable, these Consolidated Financial Statements and
Notes thereto reflect the Common Stock split on a retroactive basis.
PREFERRED STOCK
At December 31, 1997, the Company had 5,000,000 authorized shares of
preferred stock ("Preferred Stock"), par value $.01, with no shares issued.
45
<PAGE>
At December 31, 1996, the Company had two classes of convertible preferred
stock ("Convertible Preferred Stock"), par value $.01. There were 80,000
authorized and issued shares of Class A Convertible Preferred Stock. The Company
also had two series of Class B Preferred Stock. There were 34,328 authorized and
14,131 issued shares of Series B-1 Voting Convertible Preferred Stock and 19,403
shares authorized and issued of Series B-2 Non-Voting Convertible Preferred
Stock. During 1997, the Company issued 1,715 shares of Series B-1 Convertible
Preferred Stock as partial consideration in the Burridge investment and 10,667
shares of Class D Convertible Preferred Stock in the GeoCapital investment. Also
during 1997, Chase Equity Associates purchased 5,333 shares of Class C
Convertible Preferred Stock and warrants to purchase 28,000 shares of Class C
Convertible Preferred Stock, which were subsequently exercised. On November 21,
1997, the date of the Company's initial public offering, all issued shares of
Convertible Preferred Stock, a total of 159,249 shares, were converted 1-for-50
into the Company's Common Stock, for a total of 7,962,450 common shares. At
December 31, 1997 there were no shares of Convertible Preferred Stock authorized
or issued.
STOCK INCENTIVE PLANS
The Company has established three incentive stock plans ("Stock Plans"),
primarily to incent key employees, under which it is authorized to grant
incentive and non-qualified stock options and to grant or sell shares of stock
which are subject to certain restrictions ("Restricted Stock"). At December 31,
1997, a total of 2,300,000 shares of Common Stock have been reserved for
issuance under these plans, with a total of 337,500 shares of Restricted Stock
sold and 682,500 stock options granted. The plans are administered by a
committee of the Board of Directors. Restricted Stock sales were made at their
then fair market value, as approved by the Board of Directors of the Company,
and generally vest over three years and are subject to significant forfeiture
provisions and other restrictions. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant.
The 1994 Incentive Stock Plan (the "1994 Plan") provides for the issuance of
125,000 shares of Common Stock. As of December 31, 1997, the Company had sold an
aggregate of 125,000 shares of Restricted Stock under the 1994 Plan. These
shares vest over periods ranging up to four years. At December 31, 1997, 112,500
of these shares were vested.
The 1995 Incentive Stock Plan (the "1995 Plan") provides for the issuance of
425,000 shares of Common Stock. As of December 31, 1997, the Company had sold an
aggregate 212,500 shares of Restricted Stock under the 1995 Plan. In 1997, the
Company granted options to purchase 92,500 shares to officers of the Company
with an exercise price of $9.10 per share. These options vest over a three year
period ending December 31, 1999. As of December 31, 1997, none of the options
granted under the 1995 Plan had been exercised. The Company does not intend to
make any further grants under the 1995 Plan.
The 1997 Stock Option and Incentive Plan (the "1997 Plan") provides for the
issuance of 1,750,000 shares of Common Stock. In connection with the Company's
initial public offering on November 21, 1997, the Company granted options to
purchase 590,000 shares of Common Stock to officers and employees of the Company
with an exercise price of $23.50 per share. These options are exercisable over
seven years, with 15% exercisable on each of the first six anniversaries of the
date of grant and 10% exercisable on the seventh anniversary of the date of
grant. The vesting period of these options will be accelerated upon a change in
control of the Company or upon the achievement of certain financial goals. On
December 11, 1997, the Company granted an option to purchase 10,000 shares of
Common Stock, with an exercise price of $24.94 per share, to a newly elected
director of the Company. This option becomes exercisable in equal installments
of 625 shares on the first day of each calendar quarter commencing April 1,
1998. The vesting period of this option will be accelerated upon a change in
control of the Company. As of December 31, 1997, none of the options granted
under the 1997 Plan had been exercised.
46
<PAGE>
The following is a summary of outstanding and exercisable options under the
Stock Plans at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
PRICE PRICE OPTIONS EXPIRATION
SHARES ($/SHARE) ($/SHARE) EXERCISABLE DATE
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1996................ -- -- --
Options granted......................................... 92,500 $ 9.10 30,833 5/31/07
Options granted......................................... 590,000 $ 23.50 -- 11/26/07
Options granted......................................... 10,000 $ 24.94 -- 12/10/07
Options exercised....................................... -- --
Options canceled........................................ -- --
--------- ----------- -----------
Options outstanding at December 31, 1997................ 692,500 $ 21.60 30,833
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
SUPPLEMENTAL DISCLOSURE FOR EQUITY-BASED COMPENSATION
The Company continues to apply APB 25 and related interpretations in
accounting for its sales of Restricted Stock, grants of stock options and
equity-based interests in Affiliates. FAS 123 defines a fair value method of
accounting for the above arrangements whose impact requires disclosure. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the expected service period.
The required disclosures under FAS 123 as if the Company had applied the new
method of accounting are made below.
Had compensation cost for the Company's equity-based compensation
arrangements been determined based on the fair value at grant date for awards
subsequent to January 1, 1995, consistent with the requirements of FAS 123, the
Company's net (loss) and net (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net (loss)--as reported................................................. $ (2,936) $ (2,372) $ (8,368)
Net (loss)--FAS 123 pro forma........................................... (3,091) (2,141) (8,837)
Net (loss) per share--basic--as reported................................ (2.95) (5.49) (3.69)
Net (loss) per share--basic--FAS 123 pro forma.......................... (3.10) (4.96) (3.89)
Net (loss) per share--diluted--as reported.............................. (2.95) (5.49) (1.02)
Net (loss) per share--diluted--FAS 123 pro forma........................ (3.10) (4.96) (1.07)
</TABLE>
Solely for purposes of providing the pro forma disclosures required by FAS
123, the fair value of each option grant was estimated on the date of grant
using the minimum value method prior to the initial public offering and the
Black-Scholes option-pricing model after the offering, with the following
weighted average assumptions used for grants of options.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1997
--------- ---------
<S> <C> <C>
Dividend yield...................................................................... 0% 0%
Volatility.......................................................................... 0% 26%
Risk-free interest rates............................................................ 6.5% 5.96%
Expected option lives in years...................................................... 11.3 6.7
Assumed forfeiture rate............................................................. 0% 29.3%
</TABLE>
The estimated fair value of grants of stock options and equity-based
interests in Affiliates was $2.9 million and $4.6 million for 1995 and 1997,
respectively. There were no grants in 1996.
47
<PAGE>
13. EARNINGS (LOSS) PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). This standard
became effective for financial statements issued for periods ending after
December 15, 1997. The Company has adopted FAS 128 for its fiscal year ended
December 31, 1997 and has restated prior-period EPS data to conform to the new
standard.
The calculation for the basic earnings per share is based on the weighted
average of common shares outstanding during the period. The calculation for the
diluted earnings per share is based on the weighted average of common and common
equivalent shares outstanding during the period except where the inclusion of
common equivalent shares has an anti-dilutive effect. Following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for "income (loss) before extraordinary item" for the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item................... $ (2,936,000) $ (1,389,000) $ 1,643,000
Denominator:
Average shares outstanding--basic......................... 996,144 431,908 2,270,684
Convertible preferred stock............................... -- -- 5,496,330
Stock options and unvested restricted stock............... -- -- 468,515
------------- ------------- ------------
Average shares outstanding--diluted......................... 996,144 431,908 8,235,529
------------- ------------- ------------
------------- ------------- ------------
Income (loss) before extraordinary item per share:
Basic..................................................... $ (2.95) $ (3.22) $ 0.72
Diluted................................................... $ (2.95) $ (3.22) $ 0.20
</TABLE>
Because the computation of diluted EPS shall not assume exercise of
securities that would have an anti-dilutive effect on earnings per share, as is
the case in a loss year before extraordinary items, the effect of 3,512,576 and
5,585,382 outstanding shares of convertible preferred stock and 443,034 and
510,421 of unvested shares of restricted common stock were excluded from the
diluted calculation in 1995 and 1996, respectively.
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107"), requires the Company to
disclose the estimated fair values for certain of its financial instruments.
Financial instruments include items such as loans, interest rate contracts,
notes payable, and other items as defined in FAS 107.
Fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Quoted market prices are used when available, otherwise, management
estimates fair value based on prices of financial instruments with similar
characteristics or using valuation techniques such as discounted cash flow
models. Valuation techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates. Changes in
these assumptions will result in different valuation estimates. The fair value
presented would not necessarily be realized in an immediate sale; nor are there
plans to settle liabilities prior to contractual maturity. Additionally, FAS 107
allows companies to use a wide range of valuation techniques, therefore, it may
be difficult to compare the Company's fair value information to other companies'
fair value information.
48
<PAGE>
The following tables present a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31, 1996
and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
--------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents....................................................... $ 6,767 $ 6,767
Financial liabilities:
Notes payable to related parties................................................ (7,379) (7,374)
Senior bank debt................................................................ (33,400) (33,400)
Off-balance sheet financial instruments:
Interest-rate hedging agreements................................................ -- (763)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents..................................................... $ 23,046 $ 23,046
Financial liabilities:
Senior bank debt.............................................................. (159,500) (159,500)
Off-balance sheet financial instruments:
Interest-rate hedging agreements.............................................. -- (2,528)
</TABLE>
The carrying amount of cash and cash equivalents approximates fair value
because of the short-term nature of these instruments. The fair value of notes
payable to related parties was calculated with a discounted cash flow model
using existing payment terms and the prime rate. The carrying value of senior
bank debt approximates fair value because the debt is a revolving credit
facility with variable interest based on three-month LIBOR. The fair value of
interest rate hedging agreements are quoted market prices based on the estimated
amount necessary to terminate the agreements.
49
<PAGE>
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1996 and 1997. The amounts are in thousands except for the
per share amounts.
<TABLE>
<CAPTION>
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 6,756 $ 12,739 $ 12,675 $ 18,214
Operating income............................................. 1,686 2,227 2,087 1,171
Income (loss) before income taxes and extraordinary item..... 1,024 (320) 291 (2,203)
Income (loss) before extraordinary item...................... $ 1,196 $ (469) $ (25) $ (2,091)
Income (loss) before extraordinary item per share-- basic.... $ 3.50 $ (1.07) $ (0.05) $ (4.33)
Income (loss) before extraordinary item per share--
diluted.................................................... $ 0.19 $ (1.07) $ (0.05) $ (4.33)
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 16,568 $ 16,302 $ 20,410 $ 42,007
Operating income............................................ 3,561 2,141 3,270 13,589
Income (loss) before income taxes and extraordinary item.... 1,220 (419) 253 1,953
Income before extraordinary item............................ $ 674 $ 32 $ 127 $ 810
Income before extraordinary item per share--basic........... $ 1.31 $ 0.06 $ 0.21 $ 0.11
Income before extraordinary item per share--diluted......... $ 0.10 $ -- $ 0.02 $ 0.07
</TABLE>
During the fourth quarter of 1997, the Company completed its investment in
Tweedy, Browne. The Company also completed an initial public offering of its
shares of Common Stock. The Company used the net proceeds of the initial public
offering to repay outstanding indebtedness and recognized an extraordinary
write-off of $10,011, net of taxes (representing $(1.37) and $(0.81) per share
on a basic and diluted basis, respectively) from the early retirement of such
indebtedness.
16. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
On March 20, 1998, the Company completed its investment in Essex Investment
Management Company, LLC ("Essex"). The Company paid $69.6 million in cash and
the assumption of debt and 1,750,942 shares of its Class C Convertible
Non-Voting Stock, $.01 par value per share (the "Class C Stock"). Each share of
Class C Stock converts into one share of Common Stock upon the earlier of March
20, 1999, or certain extraordinary events.
The total purchase price including cash, stock and capitalized transaction
costs associated with this investment is allocated as follows:
<TABLE>
<S> <C>
Allocation of Purchase Price:
Net tangible assets............................................. $ 7,408
Intangible assets............................................... 93,386
---------
Total purchase price........................................ $ 100,794
---------
---------
</TABLE>
The amortization periods used for intangible assets related to this
investment are 28 years for acquired client relationships and 30 years for
goodwill. Unaudited pro forma data for the years ended December 31, 1996 and
1997 are set forth below, giving consideration to the Essex investment and
50
<PAGE>
investments occurring in the two years ended December 31, 1997, as if such
transactions had occurred as of the beginning of 1996, assuming revenue sharing
arrangements had been in effect for the entire period and after making certain
other pro forma adjustments. This pro forma data has been prepared following APB
16.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Revenues........................................................................ $ 153,771 $ 186,258
Income before extraordinary item................................................ 3,155 10,181
Extraordinary item, net......................................................... (584) (6,141)
Net income...................................................................... 2,571 4,040
Income before extraordinary item per share--basic............................... $ 0.16 $ 0.53
Income before extraordinary item per share--diluted............................. 0.16 0.52
Net income per share--basic..................................................... 0.13 0.21
Net income per share--diluted................................................... 0.13 0.21
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information in Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive Proxy Statement, which will be filed not
later than 120 days after the end of the Company's fiscal year.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a)(1) Financial Statements: See Item 8
(2) Financial Statement Schedule: See Page 56
(3) Exhibits
2.1 Purchase Agreement dated August 15, 1997 by and among the Registrant, Tweedy, Browne
Company L.P. and the partners of Tweedy, Browne Company L.P. (excluding schedules
and exhibits, which the Registrant agrees to furnish supplementally to the
Commission upon request) (2)
2.2 Agreement and Plan of Reorganization dated August 15, 1997 by and among the
Registrant, AMG Merger Sub, Inc., GeoCapital Corporation, GeoCapital, LLC and the
stockholders of GeoCapital Corporation (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the Commission upon request)
(2)
2.3 Stock Purchase Agreement dated as of January 17, 1996 by and among the Registrant,
First Quadrant Holdings, Inc., Talegen Holdings, Inc., certain employees of First
Quadrant Corp. and the other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
2.4 Amendment to Stock Purchase Agreement by and among the Registrant, First Quadrant
Holdings, Inc., Talegen Holdings, Inc., certain managers of First Quadrant Corp.
and the Management Corporations identified therein, effective as of March 28, 1996
(2)
2.5 Partnership Interest Purchase Agreement dated as of June 6, 1995 by and among the
Registrant, Mesirow Asset Management, Inc., Mesirow Financial Holdings, Inc.,
Skyline Asset Management, L.P., certain managers of Mesirow Asset Management, Inc.
and the Management Corporations identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
2.6 Amendment, made by and among Mesirow Financial Holdings, Inc. and the Registrant, to
Partnership Interest Purchase Agreement by and among the Registrant, Mesirow Asset
Management, Inc., Mesirow Financial Holdings, Inc., Skyline Asset Management,
L.P., certain managers of Mesirow Asset Management, Inc. and the Management
Corporations identified therein, effective as of August 30, 1995 (2)
2.7 Agreement and Plan of Reorganization dated January 15, 1998 by and among the
Registrant, Constitution Merger Sub, Inc., Essex Investment Management Company,
Inc. and certain of the stockholders of Essex Investment Management Company, Inc.
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request)(1)
2.8 Amendment to Agreement and Plan of Reorganization dated March 19, 1998 by and among
the Registrant, Constitution Merger Sub, Inc., Essex Investment Management
Company, Inc. and certain of the stockholders of Essex Investment Management
Company, Inc. (excluding schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request)(1)
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amended and Restated By-laws (2)
4.1 Specimen certificate for shares of Common Stock of the registrant (2)
</TABLE>
52
<PAGE>
<TABLE>
<C> <S>
4.2 Credit Agreement dated as of December 22, 1997 by and among Chase Manhattan Bank,
NationsBank, N.A. and the other lenders identified therein and the Registrant
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (1)
4.3 Stock Purchase Agreement dated November 7, 1995 by and among the Registrant, TA
Associates, NationsBank, The Hartford, and the additional parties listed on the
signature pages thereto (excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon request) (2)
4.4 Preferred Stock and Warrant Purchase Agreement dated August 15, 1997 between the
Registrant and Chase Equity Associates (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the Commission upon request)
(2)
4.5 Amendment No. 1 to Preferred Stock and Warrant Purchase Agreement dated as of
October 9, 1997 between the Registrant and Chase Equity Associates (2)
4.6 Securities Purchase Agreement dated August 15, 1997 between the registrant and Chase
Equity Associates (excluding schedules and exhibits, which the Registrant agrees
to furnish supplementally to the Commission upon request) (2)
4.7 Securities Purchase Agreement Amendment No. 1 dated as of October 9, 1997 between
the Registrant and Chase Equity Associates (2)
10.1 Amended and Restated Stockholders' Agreement dated October 9, 1997 by and among the
Registrant and TA Associates, NationsBank, The Hartford, Chase Capital and the
additional parties listed on the signature pages thereto (2)
10.2 Tweedy, Browne Company LLC Limited Liability Company Agreement dated October 9, 1997
by and among the Registrant and the other members identified therein (excluding
schedules and exhibits, which the Registrant agrees to furnish supplementally to
the Commission upon request) (2)
10.3 GeoCapital, LLC Amended and Restated Limited Liability Company Agreement dated
September 30, 1997 by and among the Registrant and the members identified therein
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.4 First Quadrant, L.P. Amended and Restated Limited Partnership Agreement dated March
28, 1996 by and among the Registrant and the partners identified therein
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.5 Amendment to First Quadrant, L.P. Amended and Restated Limited Partnership Agreement
by and among the Registrant and the partners identified therein, effective as of
October 1, 1996 (2)
10.6 Second Amendment to First Quadrant, L.P. Amended and Restated Limited Partnership
Agreement by and among the Registrant and the partners identified therein,
effective as of December 31, 1996 (2)
10.7 First Quadrant U.K., L.P. Limited Partnership Agreement dated March 28, 1996 by and
among the Registrant and the partners identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
10.8 Skyline Asset Management, L.P. Amended and Restated Limited Partnership Agreement
dated August 31, 1995 by and among the Registrant and the partners identified
therein (excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.9 Amendment to Skyline Asset Management, L.P. Amended and Restated Limited Partnership
Agreement by and among the Registrant and the partners identified therein,
effective as of August 1, 1996 (2)
10.10 Second Amendment to Skyline Asset Management, L.P. Amended and Restated Limited
Partnership Agreement by and among the Registrant and the partners identified
therein, effective as of December 31, 1996 (2)
10.11 Affiliated Managers Group, Inc. 1997 Stock Option and Incentive Plan (2)
10.13 Affiliated Managers Group, Inc. 1995 Incentive Stock Plan (2)
10.14 Form of Tweedy, Browne Employment Agreement (2)
10.15 Essex Investment Management Company, LLC Amended and Restated Limited Liability
Company Agreement dated March 20, 1998 by and among the Registrant and the members
identified therein (excluding schedules and exhibits, which the Registrant agrees
to furnish supplementally to the Commission upon request) (1)
10.16 Form of Essex Employment Agreement (1)
21.1 Schedule of Subsidiaries (1)
27.1 Financial Data Schedule (1)
</TABLE>
- ------------------------
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-34679), filed August 29, 1997, as amended
54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Affiliated Managers
Group, Inc. is included in Item 8 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachussetts
February 10, 1998
55
<PAGE>
Schedule II
Valuation and Qualifying Accounts
INCOME TAX VALUATION ALLOWANCE
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
YEAR ENDING BEGINNING COSTS AND AND END OF
DECEMBER 31, OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ------------------------------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995................ $ -- $ -- $ -- $ --
1996................ -- 477 -- 477
1997................ 477 1,512 -- 1,989
</TABLE>
56
<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.
AFFILIATED MANAGERS GROUP, INC.
(Registrant)
Date: March 31, 1998
By: /s/ WILLIAM J. NUTT
-----------------------------------------
William J. Nutt
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------------------------- -------------------
<C> <S> <C>
/s/ WILLIAM J. NUTT President, Chief Executive Officer and Chairman of
- ---------------------------------------- the Board of Directors (Principal Executive March 31, 1998
(William J. Nutt) Officer)
/s/ BRIAN J. GIRVAN Senior Vice President, Chief Financial Officer and
- ---------------------------------------- Treasurer (Principal Financial and Principal March 31, 1998
(Brian J. Girvan) Accounting Officer)
/s/ RICHARD E. FLOOR
- ---------------------------------------- Director March 31, 1998
(Richard E. Floor)
/s/ ROGER B. KAFKER
- ---------------------------------------- Director March 31, 1998
(Roger B. Kafker)
/s/ P. ANDREWS MCLANE
- ---------------------------------------- Director March 31, 1998
(P. Andrews Mclane)
/s/ JOHN M.B. O'CONNOR
- ---------------------------------------- Director March 31, 1998
(John M.B. O'Connor)
/s/ W.W. WALKER, JR.
- ---------------------------------------- Director March 31, 1998
(W.W. Walker, Jr.)
/s/ WILLIAM F. WELD
- ---------------------------------------- Director March 31, 1998
(William F. Weld)
</TABLE>
57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.7
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 2.7
<TEXT>
<PAGE>
EXHIBIT 2.7
AGREEMENT AND PLAN OF REORGANIZATION
by and among
AFFILIATED MANAGERS GROUP, INC.
as "AMG"
CONSTITUTION MERGER SUB, INC.
as "Merger Sub"
ESSEX INVESTMENT MANAGEMENT COMPANY, INC.
as the "Company"
and
The Majority Stockholders of the Company Named Herein
Dated as of January 15, 1998
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
----
SECTION 1. THE MERGER..................................................2
1.1 The Merger..................................................2
1.2 Effective Time..............................................2
1.3 Effects of the Merger.......................................2
1.4 Articles of Organization....................................2
1.5 By-Laws.....................................................3
1.6 Directors and Officers......................................3
1.7 Conversion of Securities of the Company.....................3
1.8 Additional Consideration....................................4
1.9 Time and Place of Closing...................................4
1.10 Further Assurances..........................................4
1.11 Transfer Taxes..............................................5
1.12 Supplemental Purchase Agreement.............................5
1.13 Redemption Agreement........................................5
SECTION 2. CONTRIBUTION OF ASSETS AND RESTATEMENT OF LLC
AGREEMENT...................................................5
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND MAJORITY STOCKHOLDERS...................................6
3.1 Making of Representations and Warranties....................6
3.2 Organization and Qualification of the Company and the LLC...6
3.3 Capital Stock of the Company; Beneficial Ownership..........7
3.4 Subsidiaries................................................7
3.5 Authority of the Company....................................8
3.6 Real and Personal Property.................................10
3.7 Assets Under Management....................................11
3.8 Financial Statements.......................................11
3.9 Taxes......................................................12
3.10 Collectibility of Accounts Receivable......................14
3.11 Absence of Certain Changes.................................14
3.12 Ordinary Course............................................16
3.13 Banking Relations..........................................16
3.14 Intellectual Property......................................16
3.15 Contracts..................................................18
3.16 Litigation.................................................19
3.17 Compliance with Laws.......................................20
3.18 Business; Registrations....................................20
3.19 Insurance..................................................22
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3.20 Powers of Attorney.........................................22
3.21 Finder's Fee...............................................22
3.22 Corporate Records; Copies of Documents.....................22
3.23 Transactions with Interested Persons.......................22
3.24 Employee Benefit Programs..................................23
3.25 Directors, Officers and Employees..........................25
3.26 Non-Foreign Status.........................................26
3.27 Transfer of Shares.........................................26
3.28 Stock Repurchase...........................................26
3.29 Code of Ethics.............................................26
3.30 Certain Representations and Warranties as to Collective
Investment Vehicles........................................26
SECTION 4. SEVERAL REPRESENTATIONS AND WARRANTIES OF
MAJORITY STOCKHOLDERS......................................29
4.1 Company Shares.............................................29
4.2 Authority..................................................29
4.3 Ownership of LLC Interests.................................30
4.4 Finder's Fee...............................................30
4.5 Investment Advisory Representation.........................30
4.6 Agreements.................................................30
4.7 Employment Data............................................31
4.8 Good Health................................................31
SECTION 5. COVENANTS OF THE COMPANY AND THE MAJORITY
STOCKHOLDERS...............................................31
5.1 Making of Covenants and Agreements.........................31
5.2 Client Consents............................................31
5.3 Authorizations.............................................32
5.4 Authorization from Others..................................32
5.5 Status.....................................................32
5.6 Conduct of Business........................................33
5.7 Financial Statements.......................................34
5.8 Preservation of Business and Assets........................35
5.9 Observer Rights and Access.................................35
5.10 Notice of Default..........................................35
5.11 Consummation of Agreement..................................35
5.12 Cooperation of the Company and Stockholders................36
5.13 No Solicitation of Other Offers............................36
5.14 Confidentiality............................................36
5.15 Tax Returns................................................37
5.16 Policies and Procedures....................................37
5.17 No Violation of LLC Agreement..............................37
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5.18 Subsidiaries; Investments in Other Persons.................37
5.19 LLC Interests..............................................37
5.20 Employee Programs..........................................38
5.21 Foreign Qualifications.....................................38
5.22 Liens......................................................38
SECTION 5A. COVENANTS OF THE COMPANY, THE MAJORITY
STOCKHOLDERS AND AMG WITH RESPECT TO CERTAIN TAX
MATTERS....................................................38
5A.1 Section 338(h)(10) Election................................38
5A.2. Tax Periods Ending on or Before the Closing Date...........39
5A.3. Cooperation on Tax Matters.................................40
5A.4 Tax Status.................................................40
SECTION 6. REPRESENTATIONS AND WARRANTIES OF AMG......................40
6.1 Making of Representations and Warranties...................40
6.2 Organization of AMG........................................41
6.3 Authority of AMG...........................................41
6.4 Capitalization.............................................41
6.5 Litigation.................................................42
6.6 Acquisition of Shares for Investment.......................42
6.7 Finder's Fee...............................................43
6.8 Merger Sub.................................................43
6.9 Financial Statements.......................................43
6.10 Absence of Changes.........................................43
SECTION 7. COVENANTS OF AMG...........................................44
7.1 Making of Covenants and Agreement..........................44
7.2 Confidentiality............................................44
7.3 Cooperation of AMG.........................................44
7.4 HSR Act....................................................44
7.5 Notice of Default..........................................44
7.6 Consummation of Agreement..................................45
7.7 Contribution to LLC........................................45
7.8 Transactions in AMG Shares.................................45
SECTION 8. CONDITIONS TO THE OBLIGATIONS OF AMG.......................45
8.1 Litigation; No Opposition..................................45
8.2 Representations, Warranties and Covenants..................46
8.3 Client Consents............................................47
8.4 Transfer...................................................48
8.5 Registration as an Investment Adviser......................48
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8.6 Other Approvals............................................48
8.7 HSR Act....................................................48
8.8 Restated LLC Agreement.....................................48
8.9 Employment Agreements......................................48
8.10 Non Solicitation/Non Disclosure Agreements.................49
8.11 Capitalization, Net Worth and Working Capital of the
Company and the LLC........................................49
8.12 Delivery...................................................49
8.13 Material Adverse Effect....................................51
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE
MAJORITY STOCKHOLDERS......................................51
9.1 No Litigation; No Opposition...............................51
9.2 Representations, Warranties and Covenants..................52
9.3 Client Consent.............................................52
9.5 Registration as an Investment Adviser......................53
9.6 HSR Act....................................................53
SECTION 10. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED....................54
10.1 Termination................................................54
10.2 Effect of Termination......................................54
10.3 Right to Proceed...........................................54
SECTION 11. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING...................55
11.1 Survival of Representations, Warranties and Covenants......55
11.2 Regulatory Filings.........................................55
SECTION 12. INDEMNIFICATION................................................56
12.1 Indemnification by the Majority Stockholders...............56
12.2 Limitations on Indemnification by the Majority Stockholders56
12.3 Indemnification by AMG.....................................57
12.4 Limitation on Indemnification by AMG.......................58
12.5 Notice; Defense of Claims..................................58
12.6 Satisfaction of Indemnification Obligations................59
12.7 Procedure..................................................60
12.8 Exclusive Remedy...........................................60
SECTION 13. DEFINITIONS....................................................60
13.1 Definitions................................................60
SECTION 14. MISCELLANEOUS..................................................65
14.1 Fees and Expenses..........................................65
14.2 Dispute Resolution.........................................66
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14.3 Waivers....................................................66
14.4 Governing Law..............................................67
14.5 Notices....................................................67
14.6 Entire Agreement; Severability.............................68
14.7 Assignability; Binding Effect..............................68
14.8 Captions and Gender........................................69
14.9 Execution in Counterparts..................................69
14.10 Amendments.................................................69
14.11 Publicity and Disclosures..................................69
14.12 Consent to Jurisdiction....................................69
14.13 Guarantee..................................................69
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EXHIBITS
Exhibit 1.2 - Form of Articles of Merger
Exhibit 1.7A - Certificate of Designations
Exhibit 1.7B - Escrow Agreement
Exhibit 1.12 - Form of Supplemental Purchase Agreement (including
exhibits)
Exhibit 1.13 - Form of Redemption Agreement (including exhibits)
Exhibit 2.1A - Form of Initial LLC Contribution Agreement
Exhibit 2.1B - Form of Final LLC Contribution Agreement
Exhibit 2.2 - Form of Restated LLC Agreement
Exhibits 5.2A, 5.2B,
5.2C and 5.2D - Forms of Client Consent Letters
Exhibit 6.9 - Financials of AMG
Exhibit 8.9 - Form of Employment Agreement
Exhibit 8.10 - Form of Non Solicitation Agreement
Exhibit 8.12(i) - Form of Opinion of Counsel to the Company, the LLC
and the Stockholders
Exhibit 8.12(j) - Form of Release of Company and LLC from certain
liabilities
Exhibit 8.12(k) - Form of Representation Certificate
Exhibit 8.12(l) - Form of Consent Certificate
Exhibit 8.12(m) - Form of Capitalization, Net Worth and Working
Capital Certificate
Exhibit 8.12(o) - Form of Supplemental Indemnification Agreement
Exhibit 8.12(p) - Form of Bermuda counsel opinion
Exhibit 8.13 - Form of Material Adverse Effect Certificate
Exhibit 9.4(f) - Form of Opinion of Counsel to AMG
SCHEDULES
Schedule 1.7 - Stockholders and Shares; Consideration
Schedule 1.13 - Redeeming Stockholders
Schedule 3.2(b) - Foreign Qualification (LLC)
Schedule 3.3 - Capital Stock; Voting Agreements
Schedule 3.4(a) - Subsidiaries
Schedule 3.4(b)(i) - LLC Capitalization pre-Closing
Schedule 3.4(b)(ii) - LLC Capitalization post-Closing and LLC Contribution
Schedule 3.5 - Approvals; Waivers
Schedule 3.6(a) - Real Property
Schedule 3.6(b) - Assets
Schedule 3.7 - Advisory Contracts; Assets Under Management
Schedule 3.8 - Financial Statements
Schedule 3.9 - Taxes
Schedule 3.10 - Accounts Receivable
Schedule 3.11 - Adverse Changes
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Schedule 3.13 - Banking Relations
Schedule 3.14 - Intellectual Property
Schedule 3.15 - Contracts; Commitments
Schedule 3.18(a) - Clients
Schedule 3.18(b) - Investment Adviser Qualification
Schedule 3.19 - Insurance
Schedule 3.24 - Employee Program
Schedule 3.25(a) - Directors and Officers; Certain Employees
Schedule 3.25(b) - Employment Arrangements
Schedule 3.27 - Share Transfers
Schedule 3.28 - Repurchases
Schedule 4.5 - Charitable Organizations
Schedule 4.7 - Employment Data
Schedule 4.8 - Good Health
Schedule 6.3 - Consents
Schedule 6.4 - AMG's Capitalization
Schedule 6.10 - Adverse Changes
Schedule 12.2(a) - Stockholder Indemnification Amounts
(vii)
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT entered into as of January 15, 1998, by and among Affiliated
Managers Group, Inc., a Delaware corporation ("AMG"), Constitution Merger Sub,
Inc., a Massachusetts corporation and a wholly owned subsidiary of AMG ("Merger
Sub"), Essex Investment Management Company, Inc., a Massachusetts corporation
(the "Company"), and the holders of the Company's capital stock party hereto
collectively referred to as the "Majority Stockholders" and, each individually
as a "Majority Stockholder").
W I T N E S S E T H
WHEREAS, the Company is engaged in the business of providing investment
management and advisory services to private accounts of certain institutional
and individual investors;
WHEREAS, the Stockholders (as this and other capitalized terms are defined
in Section 13.1) own of record and beneficially all of the issued and
outstanding capital stock of the Company, consisting of thirty-one thousand five
hundred fifty (31,550) shares of the Company's Common Stock, par value $1 per
share (the "Common Stock") and fourteen thousand nine hundred fifty (14,950)
shares of the Company's Class A Non-Voting Common Stock, par value $1 per share
(the "Class A Stock") (said shares of Common Stock and Class A Stock being
referred to herein collectively as the "Company Shares");
WHEREAS, the Company and the Majority Stockholders and certain other
Persons have formed Essex Investment Management Company, LLC;
WHEREAS, the parties hereto desire, and the Boards of Directors of AMG and
the Company have each determined that it is in the best interests of their
respective stockholders, and the Majority Stockholders of the Company have
determined, to enter into this agreement and the Supplemental Purchase Agreement
providing for the acquisition by AMG, of the Company, by means of a merger of
Merger Sub with and into the Company, and further desire that, in connection
therewith, the LLC's Existing Limited Liability Company Agreement be amended and
restated into the Restated LLC Agreement;
WHEREAS, the parties hereto desire and intend that, immediately following
the Closing (as such term is defined in Section 1.8), the Company will
contribute all or substantially all of its assets to Essex Investment Management
Company, LLC, a Delaware limited liability company (the "LLC"); and
WHEREAS, to induce the parties hereto to enter into this Agreement, and to
receive the benefits that will accrue to them if Merger Sub merges with and into
the Company as contemplated hereby, the Company and the parties hereto have
agreed to make certain representations, warranties and covenants as set forth
herein.
<PAGE>
NOW, THEREFORE, in order to consummate said merger and in consideration of
the mutual agreements set forth herein and other valuable consideration, the
receipt and adequacy whereof are hereby acknowledged, the parties hereto agree
as follows:
SECTION 1. THE MERGER
1.1 The Merger. Subject to the terms, provisions and conditions contained
in this Agreement, and on the basis of the representations, warranties and
covenants herein set forth, at the Effective Time (as such term is defined in
Section 1.2), in accordance with this Agreement and the provisions of the
Business Corporation Law of the Commonwealth of Massachusetts, Merger Sub hereby
agrees to and AMG hereby agrees to cause the Merger Sub to merge with and into
the Company (the "Merger"). The Company shall be the surviving corporation
(sometimes referred to herein as the "Surviving Corporation") of the Merger and
shall continue its corporate existence under the laws of the Commonwealth of
Massachusetts as a subsidiary of AMG. Upon consummation of the Merger, the
separate corporate existence of Merger Sub shall terminate.
1.2 Effective Time. The Merger shall become effective at the time the
Secretary of State of the Commonwealth of Massachusetts endorses his approval on
the articles of merger in the form attached hereto as Exhibit 1.2 (the "Articles
of Merger"), which shall be filed (accompanied by the applicable fee) with the
Secretary of State of the Commonwealth of Massachusetts on the date of the
Closing. The "Effective Time" shall be the date and time when the Merger becomes
effective. The parties hereto agree to execute, act on, make and amend (as AMG
or the Company deems necessary or appropriate) all filings or other recordings
required in connection with the Merger.
1.3 Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects provided herein and set forth in the applicable
provisions of the Business Corporation Law of the Commonwealth of Massachusetts.
Without limiting the generality of the foregoing and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the
Company and Merger Sub shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation (it being
understood that (i) the Majority Stockholders shall be liable for certain
liabilities set forth in Section 12 of this Agreement and (ii) all liabilities
of the Company will be transferred to the LLC pursuant to the LLC Contribution).
1.4 Articles of Organization. The Articles of Organization of the
Surviving Corporation shall be the Articles of Organization of Merger Sub
immediately prior to the Effective Time, until thereafter amended in accordance
with applicable law and such Articles of Organization.
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1.5 By-Laws. Unless otherwise determined by AMG prior to the Effective
Time, the By-laws of the Surviving Corporation shall be the By-laws of Merger
Sub immediately prior to the Effective Time, until thereafter amended in
accordance with applicable law, the Articles of Organization of the Surviving
Corporation and such By-laws.
1.6 Directors and Officers. Unless otherwise determined by AMG prior to
the Effective Time, the initial directors and officers of the Surviving
Corporation shall be the directors and officers of Merger Sub immediately prior
to the Effective Time, each to hold office in accordance with the Articles of
Organization and By-laws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
1.7 Conversion of Securities of the Company.
(a) At the Effective Time, all of the shares of Company Common Stock
and all of the shares of Company Class A Stock issued and outstanding
immediately prior to the Effective Time and all rights attached thereto, shall,
by virtue of this Agreement and without any action on the part of the holder
thereof, be converted into the right to receive, subject to adjustment as
provided in this Section 1.7: (i) cash in the aggregate amount of sixty-nine
million six hundred thousand dollars ($69,600,000) and (ii) one million seven
hundred fifty thousand nine hundred forty two (1,750,942) shares of AMG's Series
C Non-Voting Convertible Stock, $.01 par value per share (the "AMG Shares" and,
together with such cash, the "Merger Consideration"), established and designated
under the Certificate of Designations of AMG attached hereto as Exhibit 1.7A
(the "Certificate of Designations"). At the Effective Time, the Merger
Consideration shall be allocated among the Stockholders and to the escrow agent
under the Escrow Agreement and shall be paid to the Stockholders and, in the
case of the cash portion of the Merger Consideration, to the escrow agent on
behalf of the holders of Company Shares named in, and pursuant to the terms and
conditions of, the Escrow Agreement in substance materially consistent with that
attached hereto as Exhibit 1.7B (the "Escrow Agreement") as set forth in
Schedule 1.7. In addition, pursuant to the terms of the Escrow Agreement, AMG
will, from time to time and as additional Merger Consideration, deliver to such
escrow agent the number of additional AMG Shares set forth in Schedule 1.7.
(b) If, as of the Closing, the Company shall have received Consents
from clients whose investment advisory agreements provide for the payment (based
on the Contract Value of each such investment advisory agreement) of fees
constituting less than ninety-five percent (95%) of the Base Fees, then the
Merger Consideration delivered to each Stockholder pursuant to Section 1.7(a)
shall be subject to further adjustment, as set forth in Schedule 1.7.
(c) All of the shares of Common Stock converted into the right to
receive the Merger Consideration pursuant to this Section 1.7 shall no longer be
outstanding and shall automatically be canceled and shall cease to exist, and
each certificate previously representing any such shares of Common Stock shall
thereafter represent only the right to receive the portion of the Merger
Consideration into which the shares of Common Stock represented by such
certificate have been converted pursuant to this Section 1.7. Certificates
previously
3
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representing shares of Common Stock and Class A Stock shall be surrendered at
the Closing and shall be exchanged for Merger Consideration paid in
consideration therefor, without any interest thereon.
1.8 Additional Consideration.
(a) In the event that any Client which (a) has a contract that
neither prohibits assignment by its terms nor terminates by its terms upon
consummation of the transactions contemplated hereby does not Consent at or
prior to the Closing (and AMG in its sole discretion does not elect to treat
such client as having Consented at the Closing), then (a) such Client shall be
treated, for purposes of calculating the Merger Consideration hereunder, as
having withdrawn its assets, but the Company or the LLC may continue to provide
services to such Client and (b) in the event that, as of the date that is sixty
(60) days after the date of the Closing, the Company or the LLC is able to
obtain the Consent of such Client, then the Company shall make an additional
payment to the escrow agent under the Escrow Agreement, in accordance with
Schedule 1.7, unless AMG and the Majority Stockholders agree otherwise.
(b) In the event that any Client which has a contract that prohibits
assignment by its terms or terminates by its terms upon consummation of the
transactions contemplated hereby does not Consent at or prior to the Closing
(and AMG in its sole discretion does not elect to treat such client as having
Consented at Closing), then (a) such Client shall be treated, for purposes of
calculating the Merger Consideration hereunder, as having withdrawn its assets,
but the Company or the LLC may continue to provide services to such Client and
(b) in the event that, as of or prior to the date that is sixty (60) days after
the date of the Closing, the LLC is able to enter into a contract with such
Client with substantially identical terms, then the Company shall make an
additional payment to the escrow agent under the Escrow Agreement, in accordance
with Schedule 1.7, unless AMG and the Majority Stockholders otherwise agree.
1.9 Time and Place of Closing. The closing of the Merger and the related
transactions provided for in this Agreement (herein called the "Closing") shall
be held at the offices of Goodwin, Procter & Hoar LLP at Exchange Place, Boston,
Massachusetts at 10:00 a.m. local time on the date of the Closing, which shall
be five (5) business days after the fulfillment or waiver of each of the
conditions set forth in Sections 8 (other than Section 8.12) and 9 (other than
Section 9.4) hereof (or following the extension period as contemplated by
Section 8.1 and Section 9.1) or at such other place, or an earlier or later date
or time as may be mutually agreed upon by AMG and the Company.
1.10 Further Assurances. The Majority Stockholders shall (in their
respective capacities as individuals and as officers of the Company), from time
to time after the Closing, at the request of AMG and without further
consideration, execute and deliver further instruments of transfer and
assignment and take such other action as AMG may reasonably require to fully
implement the provisions of this Agreement.
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1.11 Transfer Taxes. All transfer taxes, fees and duties under applicable
law incurred in connection with the Merger will be borne and paid fifty percent
(50%) by the Stockholders (pro rata in accordance with the Merger Consideration
received by them hereunder) and fifty percent (50%) by AMG, and the parties
shall promptly reimburse each other in accordance with such allocation for any
such tax, fee or duty which any of them is required to pay under applicable law.
1.12 Supplemental Purchase Agreement. Each Stockholder (including each
Majority Stockholder but excluding those Stockholders listed on Schedule 1.13)
who is not a Majority Stockholder has executed and delivered a Supplemental
Purchase Agreement.
1.13 Redemption Agreement. Each Stockholder listed on Schedule 1.13 has
executed and delivered a Redemption Agreement in the form attached as Exhibit
1.13 hereto (the "Redemption Agreement"), including the exhibits and attachments
thereto.
SECTION 2. CONTRIBUTION OF ASSETS AND RESTATEMENT OF LLC
AGREEMENT.
2.1 LLC Contribution. Prior to the Closing, the Company shall transfer
certain liabilities and obligations to the escrow agent under the Escrow
Agreement in accordance with the terms thereof. Promptly following the close of
business on the day of the Closing (and in any event prior to the end of such
day), the Surviving Corporation and the LLC shall, and the Surviving Corporation
shall cause the LLC to: (i) enter into the LLC Contribution Agreement in the
form attached hereto as Exhibit 2.1A (the "Initial LLC Contribution Agreement"),
as well as each of the other agreements, documents and instruments contemplated
thereby, and (ii) perform each of the transactions contemplated by the LLC
Contribution Agreement as well as each of the other agreements, documents and
instruments contemplated thereby. On the business day first following the day of
the Closing (but in any event prior to the commencement of business on such
first following day), the Surviving Corporation and the LLC shall, and the
Surviving Corporation shall cause the LLC to: (i) enter into the LLC
Contribution Agreement in the form attached hereto as Exhibit 2.1B (the "Final
LLC Contribution Agreement" and together with the Initial LLC Contribution
Agreement, the "LLC Contribution Agreement"), as well as each of the other
agreements, documents and instruments contemplated thereby, and (ii) perform
each of the transactions contemplated by the Final LLC Contribution Agreement as
well as each of the other agreements, documents and instruments contemplated
thereby. (Together, such transactions are referred to herein as the "LLC
Contribution.")
2.2 LLC Agreement. Immediately following the Closing, the Surviving
Corporation and each of the Stockholders as indicated on Schedule 3.4(b)(ii)
shall amend and restate the Existing LLC Agreement into the Limited Liability
Company Agreement in the form attached hereto as Exhibit 2.2 (the "Restated LLC
Agreement").
5
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SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
MAJORITY STOCKHOLDERS.
3.1 Making of Representations and Warranties. As a material inducement to
AMG and Merger Sub to enter into this Agreement and consummate the transactions
contemplated hereby, the Company and each of the Majority Stockholders jointly
and severally hereby makes to AMG and Merger Sub the representations and
warranties contained in this Section 3; provided, however, that each of the
Stockholders severally and not jointly, makes the representations set forth in
Section 3.3(b) hereof on his own behalf. After the Closing, no Stockholder shall
have any right of indemnity or contribution from Merger Sub or the LLC (or any
other right against Merger Sub or the LLC) with respect to any breach of a
representation or warranty of the Majority Stockholders or the Company
hereunder.
3.2 Organization and Qualification of the Company and the LLC.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts, with
full corporate power and authority to own or lease its properties and to conduct
its business in the manner and in the places where such properties are owned or
leased or such business is currently conducted. The copies of the Company's
Articles of Organization, as amended to date (the "Articles of Organization"),
certified by the Secretary of State of the Commonwealth of Massachusetts, and of
the Company's By-laws, as amended to date, certified by the Company's Clerk, and
heretofore delivered to AMG, are complete and correct, and no amendments thereto
are pending. The Company is not in violation of any term of its Articles of
Organization or By-laws. The Company is duly qualified to do business as a
foreign corporation under the laws of each jurisdiction in which the nature of
its business or the ownership or leasing of its properties requires such
qualification.
(b) The LLC is a limited liability company duly formed, validly
existing and in good standing under the laws of the State of Delaware with full
power and authority under the Delaware Limited Liability Company Act, 6 Del. C.
ss.18-101, et seq., as amended from time to time (the "Delaware Act") and the
Existing LLC Agreement (and, after the effectiveness of the Restated LLC
Agreement, the Restated LLC Agreement) to own or lease its properties and to
conduct its business in the manner and in the places where such properties are
owned or leased or such business is currently conducted or proposed to be
conducted (and, after giving effect to the Closing and the LLC Contribution, the
business currently conducted by the Company). The copies of the LLC's Existing
LLC Agreement (as such term is defined in Section 13.1), certified by the Clerk
of the Company in its capacity as Manager Member of the LLC, and of the LLC's
Certificate of Formation, as amended to date (the "Existing Certificate of
Formation"), certified by the Secretary of State of the State of Delaware, each
as heretofore delivered to AMG, are complete and correct, and no amendments
thereto are pending. The LLC is not in violation of any term of the Existing LLC
Agreement. The LLC is duly qualified to do business as a foreign limited
liability company under the laws of each jurisdiction in which the nature of its
business or the ownership or leasing of its properties
6
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requires such qualification. As of the Closing, the LLC shall be duly qualified
to do business as a foreign limited liability company under the laws of each
jurisdiction in which the nature of the business it will conduct after giving
effect to the LLC Contribution, or the ownership or leasing of the properties it
will receive in the LLC Contribution, requires such qualification, and such
jurisdictions are listed on Schedule 3.2(b).
3.3 Capital Stock of the Company; Beneficial Ownership.
(a) The authorized capital stock of the Company consists only of (i)
two hundred fifty thousand (250,000) shares of Common Stock, $1.00 par value per
share, of which thirty-one thousand five hundred fifty (31,550) shares are duly
and validly authorized, issued, outstanding, fully paid and non-assessable and
of which two hundred eighteen thousand four hundred fifty (218,450) shares are
authorized but unissued, and (ii) twenty five thousand (25,000) shares of Class
A Non-Voting Common Stock, $1.00 par value per share, of which fourteen thousand
nine hundred fifty (14,950) shares are duly and validly authorized, issued,
outstanding, fully paid and non-assessable and of which ten thousand fifty
(10,050) shares are authorized but unissued. Except as set forth in Schedule
3.3, there are no outstanding options, warrants, rights, commitments, preemptive
rights or agreements of any kind for the issuance or sale of, or outstanding
securities convertible into, any additional shares of capital stock of any class
of the Company. None of the Company's capital stock has been issued or redeemed
in violation of any federal or state law. Except as set forth in Schedule 3.3,
there are no voting trusts, voting agreements, proxies or other agreements,
instruments or undertakings with respect to the voting of the Company Shares to
which the Company or any of the Stockholders is a party. No Stockholder has any
dissenter's rights or rights of appraisal in the Merger with respect to the
Company's capital stock.
(b) Each Stockholder who is not a Majority Stockholder owns of
record, and to the knowledge of the Company and the Majority Stockholders,
beneficially, the Company Shares set forth opposite such Stockholder's name on
Schedule 1.7. Such Company Shares are, to the knowledge of the Company and the
Majority Stockholders, free and clear of any Claims, except as reflected on
Schedule 3.3. The shares of capital stock shown on Schedule 1.7 opposite each
such Stockholder's name are, to the knowledge of the Company and the Majority
Stockholders, the only shares of capital stock of the Company held by such
Stockholder or with respect to which such Stockholder has any rights, to the
knowledge of the Company and the Majority Stockholders, except as referenced on
Schedule 3.3.
3.4 Subsidiaries.
(a) Other than the Company's interest in the LLC, and as otherwise
set forth on Schedule 3.4(a), the Company has no, nor has it ever had any,
subsidiaries or investments in any other Person. The LLC has no subsidiaries or
investments in any other Person.
(b) The Company, the Stockholders and the other Persons listed on
Schedule 3.4(b)(i) hereto are all of the members of the LLC, and the
capitalization of the LLC (with
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respect to capital accounts and interests in profits) is as set forth in
Schedule 3.4(b)(i), with all such interests owned of record and, to the
knowledge of the Company and the Majority Stockholders, beneficially by the
entities and in the amounts indicated on said Schedule 3.4(b)(i), in each case,
free and clear of any Claims other than the restrictions imposed pursuant to
this Agreement. After giving effect to the Closing and the effectiveness of the
Restated LLC Agreement, the capitalization of the LLC shall be as set forth in
Schedule 3.4(b)(ii), with all such interests owned of record and, to the
knowledge of the Company and the Majority Stockholders, beneficially by the
entities and in the amounts indicated in Schedule 3.4(b)(ii), in each case, free
and clear of any Claims other than restrictions imposed pursuant to the Restated
LLC Agreement. All outstanding interests in the LLC have been duly authorized
and issued under the Existing LLC Agreement and, after giving effect to the
effectiveness of the Restated LLC Agreement, the Restated LLC Agreement. After
giving effect to the Closing and the restatement of the Existing LLC Agreement
into the Restated LLC Agreement, the Company will be the sole Manager Member (as
such term is defined in the Restated LLC Agreement) and manager (as such term is
defined in the Delaware Act) of the LLC, and the Company will have good title to
its interest in the LLC, as shown in Schedule 3.4(b)(ii). Except as set forth in
this Agreement or in the Restated LLC Agreement, there are no rights,
commitments, agreements or understandings obligating or which might obligate the
LLC or any of its members (including, without limitation, the Company) to issue,
transfer, sell or redeem any securities or interests in the LLC.
3.5 Authority of the Company.
(a) The Company has full right, authority and power to enter into
this Agreement, the Restated LLC Agreement and each agreement, document and
instrument to be executed and delivered by the Company pursuant to, or as
contemplated by, this Agreement or the Restated LLC Agreement and to carry out
the transactions contemplated hereby and thereby. The execution, delivery and
performance by the Company of this Agreement and each such other agreement,
document and instrument have been duly authorized by all necessary corporate
action of the Company and all necessary action of the Stockholders and no other
action on the part of the Company or the Stockholders is required in connection
therewith.
This Agreement, the Restated LLC Agreement and each agreement, document
and instrument executed and delivered by the Company pursuant to, or as
contemplated by, this Agreement or the Restated LLC Agreement constitutes, or
when executed and delivered will constitute, valid and binding obligation of the
Company enforceable in accordance with its terms, except as enforceability may
be restricted, limited or delayed by applicable bankruptcy or other laws
affecting creditors' rights generally. The execution, delivery and performance
by the Company of this Agreement, the Restated LLC Agreement and each such other
agreement, document and instrument:
(i) does not and will not violate any provision of the
Articles of Organization or by-laws of the Company, each as amended to
date;
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(ii) does not and will not violate any laws of the United
States, or any state or other jurisdiction applicable to the Company or
require the Company to obtain any approval, consent or waiver of, or make
any filing with, any person or entity (governmental or otherwise) that has
not been obtained or made, except as specifically identified in Schedule
3.5, which approvals, consents and waivers identified in such Schedule (as
indicated with an asterisk therein) shall have been received or made prior
to the Closing or, at any earlier time required hereunder or under
applicable laws, rules and regulations or the provisions of any agreement,
contract or instrument; and
(iii) except as reflected in Schedule 3.5, does not and will
not result in a breach of, constitute a default under, accelerate any
obligation under, or give rise to a right of termination of, any
agreement, contract, instrument, mortgage, lien, lease, permit,
authorization, order, writ, judgment, injunction, decree, determination or
arbitration award to which the Company is a party or by which the property
of the Company is bound or affected, or result in the creation or
imposition of any Claim on any of the Company's assets (or the assets of
the LLC) or any Person's interest in the Company (including, without
limitation, the Company Shares);
provided, however, that the representations in clauses (ii) and (iii)
shall not apply to investment advisory agreements to the extent that
receipt of consents from a party to such agreement is contemplated by
Section 5.2.
(b) The LLC has all requisite power and authority under the Existing
LLC Agreement and the Delaware Act (and, after the effectiveness of the Restated
LLC Agreement, under the Restated LLC Agreement and the Delaware Act) to enter
into each agreement, document and instrument to be executed and delivered by the
LLC pursuant to, or as contemplated by, this Agreement and to carry out the
transactions contemplated hereby and thereby. The execution, delivery and
performance by the LLC of each such agreement, document and instrument have been
duly authorized by all necessary action of the LLC and the Company (in its
capacity as Manager Member of the LLC) and no other action on the part of the
LLC, the Company, any of the Stockholders or any other member is required in
connection therewith.
Each agreement, document and instrument executed and delivered by the LLC
pursuant to, or as contemplated by, this Agreement constitutes, or when executed
and delivered will constitute, valid and binding obligations of the LLC
enforceable in accordance with their terms. The execution, delivery and
performance by the LLC of each such agreement, document and instrument:
(i) does not and will not violate any provision of the
Existing LLC Agreement or the Restated LLC Agreement;
(ii) does not and will not violate any laws of the United
States, or any state or other jurisdiction applicable to the LLC or
require the LLC to obtain any
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approval, consent or waiver of, or make any filing with, any person or
entity (governmental or otherwise) that has not been obtained or made,
except as specifically identified in Schedule 3.5; and
(iii) does not and will not result in a breach of, constitute
a default under, accelerate any obligation under, or give rise to a right
of termination of, any agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award to which the LLC is a party or by which
the property of the LLC is bound or affected, or result in the creation or
imposition of any mortgage, pledge, lien, security interest or other
charge or encumbrance on any of the LLC's assets or of any Person's
interests in the LLC.
3.6 Real and Personal Property.
(a) Neither the Company nor the LLC owns any real property. All of
the real property leased by the Company or the LLC is identified in Schedule
3.6(a) (herein referred to as the "Leased Real Property"). All leases of Leased
Real Property by the Company or the LLC are identified in Schedule 3.6(a), and
true and complete copies thereof have been delivered to AMG. Each of said leases
has been duly authorized by the Company and the LLC, as applicable, and is in
full force and effect. Neither the Company nor the LLC is in material default
under any of said leases, nor has any event occurred which, with the giving of
notice or the passage of time, or both, would give rise to such a material
default. To the Company's knowledge, the other party to each of said leases is
not in material default under any of said leases and there is no event which,
with the giving of notice or the passage of time, or both, would give rise to
such a material default. After giving effect to the Closing and the LLC
Contribution, each lease identified in Schedule 3.6(a) will be valid and
effective in accordance with its terms, with the LLC having succeeded to all the
rights and obligations of the Company thereunder.
(b) Attached hereto as Schedule 3.6(b) is a list of the categories
of assets of the Company and the tax basis of each such asset (or category of
assets). Except as set forth in Schedule 3.6(b) hereto, as of the date hereof,
the Company owns all its assets free and clear of any Claims. All the assets
listed in Schedules to the LLC Contribution Agreement included in Exhibit 2.1
hereto are being transferred to the LLC and, after giving effect to such
transfers, the LLC will own all such assets free and clear of any Claims except
those set forth in Schedule 3.6(b). The assets listed in Schedule 3.6(b) hereto
include all the material assets used in, and all the assets necessary for the
conduct of the business of the Company as currently conducted and all the
material assets which the LLC can reasonably be expected to require for the
conduct of such business immediately following the Closing and the LLC
Contribution, and are suitable and in an appropriate condition for such purpose.
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3.7 Assets Under Management.
(a) The aggregate assets under management by the Company as of June
30, 1997 and September 30, 1997 and December 31, 1997, are accurately set forth
in Schedule 3.7. In addition, set forth in Schedule 3.7 is a list as of June 30,
1997 and September 30, 1997 and December 31, 1997, of all investment management,
advisory or sub-advisory contracts setting forth the name of the client under
each such contract, the amount of assets under management with respect to each
such contract, the fee schedule in effect with respect to each such contract,
the Contract Value, and any material fee adjustments or material withdrawals
from or additions to the assets under management (it being understood and agreed
that withdrawals from or additions to assets under management greater than
$500,000 are material) implemented since October 31, 1997 or, to the knowledge
of the Company or the Majority Stockholders, presently proposed to be
instituted, the consent required for the assignment by the Company of each such
contract other than those that by their terms terminate upon assignment (which
are so identified), and the country, if other than the United States of America,
of which the client is a resident. Except as set forth in Schedule 3.7 and
expressly described thereon, there are no contracts, arrangements or
understandings pursuant to which the Company has undertaken or agreed to cap,
waive or reimburse any or all fees or charges payable by any of the clients set
forth in Schedule 3.7 or pursuant to any of the contracts set forth in Schedule
3.7. Except as is set forth in Schedule 3.7, no client of the Company has
expressed, to the knowledge of the Company and the Majority Stockholders, an
intention to terminate or reduce its investment relationship with the Company,
or adjust the fee schedule with respect to any contract in a manner which would
reduce the fee to the Company (or, after giving effect to the LLC Contribution,
the fee to the LLC).
(b) Set forth in Schedule 3.7 is a list of each client with which as
of December 31, 1997 the Company has a fee based on performance or otherwise
provides for compensation on the basis of a share of capital gains upon or
capital appreciation of the funds (or any portion thereof) of any client,
together with a description of such fee or compensation.
(c) Each account to which the Company provides Investment Management
Services that is (i) an employee benefit plan, as defined in Section 3(3) of
ERISA that is subject to Title I of ERISA; (ii) a person acting on behalf of
such a plan; or (iii) an entity whose assets include "plan assets" of such a
plan, within the meaning of ERISA and applicable regulations (hereinafter
referred to as an "ERISA Client"), have been managed by the Company such that
the Company in the exercise of such management is in compliance in all material
respects with the applicable requirements of ERISA. Schedule 3.7 identifies each
Client that is an ERISA Client with an appropriate footnote.
3.8 Financial Statements.
(a) The Company has delivered to AMG the following financial
statements, copies of which are attached hereto as Schedule 3.8: audited balance
sheets of the Company at November 30, 1994, November 30, 1995 and November 30,
1996, and audited statements of
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income, stockholders' equity and cash flows for each of the three (3) years then
ended. The audited balance sheet of the Company at November 30, 1996 (including
the notes thereto) is referred to hereinafter as the "Base Balance Sheet."
Said financial statements have been prepared in accordance with GAAP,
applied consistently during the periods covered thereby, and present fairly in
all material respects the financial condition of the Company at the dates of
said statements and the results of its operations for the periods covered
thereby.
(b) As of the date of the Base Balance Sheet, the Company did not
have any liabilities of any nature, whether accrued, absolute, contingent or
otherwise, asserted or unasserted, known or unknown (including, without
limitation, liabilities as guarantor or otherwise with respect to obligations of
others, liabilities for taxes due or then accrued or to become due, or
contingent or potential liabilities relating to activities of the Company or the
conduct of its businesses prior to the date of the Base Balance Sheet regardless
of whether claims in respect thereof had been asserted as of such date), except
liabilities stated or adequately reserved against on the Base Balance Sheet, or
reflected in Schedules furnished to AMG hereunder as of the date hereof.
(c) As of the date hereof (including, with respect to the giving of
this representation pursuant to Section 8.2 hereof, after giving effect to the
LLC Contribution), neither the Company nor the LLC has any liabilities of any
nature, whether accrued, absolute, contingent or otherwise, asserted or
unasserted, known or unknown (including, without limitation, liabilities as
guarantor or otherwise with respect to obligations of others, or liabilities for
taxes due or then accrued or to become due or contingent or potential
liabilities relating to activities of the Company or the LLC or the conduct of
their businesses prior to the date hereof or the Closing, as the case may be,
regardless of whether claims in respect thereof had been asserted as of such
date), except: (i) liabilities stated or adequately reserved against on the Base
Balance Sheet or the notes thereto, (ii) liabilities reflected in Schedules
furnished to AMG hereunder on the date hereof (including, without limitation, on
the audited balance sheet of the Company at November 30, 1996, included as part
of Schedule 3.8), or (iii) immaterial liabilities incurred after the date of the
audited balance sheet of the Company at November 30, 1996 (a copy of which is
attached hereto as part of Schedule 3.8) in the ordinary course of business of
the Company or the LLC which are, in the case of liabilities incurred after the
date of this Agreement, consistent with the terms of this Agreement).
3.9 Taxes.
(a) The Company and the LLC have each paid or caused to be paid all
federal, state, local, foreign, and other taxes, government fees or the like,
including, without limitation, income taxes, estimated taxes, alternative
minimum taxes, franchise taxes, capital stock taxes, sales taxes, use taxes, ad
valorem or value added taxes, employment and payroll-related taxes, withholding
taxes, and transfer taxes, whether or not measured in whole or in part by net
income, and all deficiencies, or other additions to tax, interest, fines and
penalties
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owed by it (collectively, "Taxes" and, each individually, a "Tax"), required to
be paid by it through the date hereof, whether disputed or not. The unpaid taxes
of the Company and the LLC (i) did not, as of November 30, 1996, exceed the
reserve for tax liability (rather than the reserve for deferred Taxes
established to reflect timing differences between book and tax income) set forth
in the audited balance sheet of the Company at November 30, 1996 (a copy of
which is attached hereto as part of Schedule 3.8) (rather than in any notes
thereto) and (ii) do not exceed that reserve as adjusted (including to reflect
any additional current Tax accrued in accordance with the normal operation of
the Company's business, consistent with past practices) for the passage of time
through the date hereof and the date of the Closing in accordance with the past
custom and practice of the Company and the LLC in filing their respective Tax
Returns. All Taxes required to be withheld by the Company and the LLC including,
but not limited to, Taxes arising as a result of payments to foreign persons or
to employees of the Company or the LLC, have been collected and withheld, and
have either been paid to the respective governmental agencies, set aside in
accounts for such purpose, or accrued, reserved against, and entered on the
books and records of the Company or the LLC, as applicable.
(b) Each of the Company and the LLC has, in accordance with
applicable law, filed all federal, state, local and foreign tax returns required
to be filed by it, and all such returns are accurate and complete in all
material respects. A list of all federal, state, local and foreign income tax
returns filed with respect to the Company for taxable periods ended on or after
December 31, 1991, is set forth in Schedule 3.9, and said Schedule indicates
those returns that have been audited or currently are the subject of an audit.
For each taxable period of the Company ended on or after December 31, 1991, the
Company has delivered to AMG correct and complete copies of all federal, state,
local and foreign income tax returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company.
(c) Neither the IRS nor any other governmental authority responsible
for the imposition or collection of any Tax (a "Taxing Authority") is now
asserting or, to the knowledge of the Company or any Stockholder, threatening to
assert against the Company or the LLC any deficiency or claim for additional
Taxes. No claim has ever been made by a Taxing Authority in a jurisdiction where
the Company or the LLC does not file reports and returns that the Company or the
LLC is or may be subject to taxation by that jurisdiction. There are no security
interests on any of the assets of the Company or the LLC that arose in
connection with any failure (or alleged failure) to pay any Taxes. Neither the
Company nor the LLC has ever entered into a closing agreement pursuant to
Section 7121 of the Code.
(d) Except as set forth on Schedule 3.9, there has not been any
audit of any tax return filed by the Company, no such audit is in progress, and
the Company has not been notified by any Taxing Authority that any such audit is
contemplated or pending. No extension of time with respect to any date on which
a tax return was or is to be filed by the Company or the LLC is in force, and no
waiver or agreement by the Company or the LLC is in force for the extension of
time for the assessment or payment of any Taxes.
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(e) Neither the Company nor the LLC has ever been (or has ever had
any liability for unpaid Taxes because it once was) a member of an "affiliated
group" (as defined in Section 1504(a) of the Code). Neither the Company nor the
LLC has ever filed, or has ever been required to file, a consolidated, combined
or unitary tax return with any other entity. Neither the Company nor the LLC is
a party to any tax sharing agreement.
(f) The Company (and any predecessor of the Company) has been a
validly electing S corporation within the meaning of Sections 1361 and 1362 of
the Code at all times since December 1, 1984, and the Company will be an S
corporation up to and including the date of the Closing.
(g) None of the Company's or the LLC's payroll, property, or
receipts, or other factors used in a particular state's apportionment or
allocation formula results in an apportionment or allocation of business income
to any state, commonwealth or other jurisdiction other than the Commonwealth of
Massachusetts, and neither the Company nor the LLC has any non-business income
that is allocated, apportioned or otherwise sourced to any state, commonwealth
or other jurisdiction than the Commonwealth of Massachusetts.
(h) The Company will not be liable for any Tax under Section 1374 of
the Code in connection with the deemed sale of the Company's assets caused by
the Section 338(h)(10) Election. The Company has not since January 1, 1988 (i)
acquired assets from another corporation in a transaction in which the Company's
tax basis for the acquired assets was determined, in whole or in part, by
reference to the tax basis of the acquired assets (or any other property) in the
hands of the transferor or (ii) acquired the stock of any corporation which is a
qualified subchapter S subsidiary.
3.10 Collectibility of Accounts Receivable. All of the accounts receivable
of the Company shown or reflected on the Company's balance sheet as of November
30, 1996, or existing at the date hereof (less the reserve for bad debts set
forth on such balance sheet, as adjusted since such date as set forth in
Schedule 3.10) are valid and enforceable claims, fully collectible and subject
to no setoff or counterclaim. Neither the Company nor the LLC has any accounts
or loans receivable from any person, firm or corporation or other entity which
is affiliated with the Company or from any director, officer or employee of the
Company except as disclosed in Schedule 3.10.
3.11 Absence of Certain Changes. Except as disclosed in Schedule 3.11,
since the date of the Base Balance Sheet there has not been any:
(a) event that by itself or in conjunction with all other such
events, could reasonably be expected to have a Material Adverse Effect on the
Company, the LLC or AMG;
(b) (i) amendment which has had a Material Adverse Effect or (ii)
termination or, (iii) to the knowledge of the Company and each of the Majority
Stockholders,
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proposed or threatened amendment or termination, whether written or oral, of
any agreement listed in Schedule 3.7 hereto;
(c) material obligation or liability of any nature, whether accrued,
absolute, contingent or otherwise, asserted or unasserted, known or unknown
(including, without limitation, (i) liabilities for Taxes due or to become due,
(ii) contingent or potential liabilities relating to services provided by the
Company or the conduct of the business of the Company regardless of whether
Claims in respect thereof have been asserted, or (iii) contingent liabilities
incurred by the Company or the LLC as guarantor or otherwise with respect to the
obligations of the Company or the LLC or others), incurred by the Company or the
LLC other than obligations and liabilities incurred in the ordinary course of
business consistent with the terms of this Agreement (it being understood that
liability claims in respect of services provided shall not be deemed to be
incurred in the ordinary course of business);
(d) material Claim placed on any of the properties or assets of the
Company or the LLC;
(e) cancellation of any material debt or Claim owing to, or waiver
of any material right of, the Company or the LLC;
(f) purchase, sale or other disposition, or any agreement or other
arrangement for the purchase, sale or other disposition, of any of the material
properties or assets of the Company or the LLC other than pursuant to the LLC
Contribution or in the ordinary course of business consistent with past
practices;
(g) damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
of the Company or the LLC;
(h) declaration, setting aside or payment of any dividend or
distribution by the Company or the LLC, or the making of any other distribution
in respect of the capital stock of the Company or interests in the LLC, or any
direct or indirect redemption, purchase or other acquisition by the Company or
the LLC of its own capital stock or interests, respectively, other than
distributions and dividends made in the ordinary course and consistent with past
practices and subject to satisfaction of the conditions set forth in Section
8.10;
(i) change in the compensation payable or to become payable by the
Company or the LLC to any of its officers, employees, agents or independent
contractors except (x) normal merit increases in accordance with its usual
practices, or (y) any non-recurring bonus payment or arrangement made to or with
any of such officers, employees, agents or independent contractors;
(j) change in the identities, offices or duties of the officers or
management of the Company or the LLC or any obligation or liability incurred by
the Company or the LLC
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to any of its officers, directors, stockholders, members or employees, or any
loans or advances made by the Company or the LLC to any of its officers,
directors, stockholders, members or employees, except normal compensation and
expense allowances payable to officers or employees in the ordinary course of
business consistent with past practices;
(k) payment or discharge of a material lien or liability of the
Company or the LLC other than in the ordinary course of business consistent with
the past practices of the Company;
(l) change in accounting methods or practices, or billing or
collection policies used by the Company or the LLC;
(m) other transaction entered into by the Company or the LLC other
than transactions in the ordinary course of business consistent with past
practices; or
(n) agreement or understanding, whether in writing or otherwise, for
the Company or the LLC to take any of the actions specified in paragraphs (a)
through (m) above.
3.12 Ordinary Course. Except as otherwise specifically contemplated by
this Agreement, since the date of the Base Balance Sheet, the Company has
conducted its business only in the ordinary course and consistently with its
prior practices. Since its formation, the LLC has only conducted those
operations necessary for the performance of its obligations hereunder and
activities necessary in connection herewith and therewith.
3.13 Banking Relations. All of the arrangements which the Company or the
LLC has with any banking institution are, in all material respects, accurately
described in Schedule 3.13, indicating with respect to each of such arrangements
the type of arrangement maintained (such as checking account, borrowing
arrangements, etc.) and the person or persons authorized in respect thereof.
3.14 Intellectual Property.
(a) Except as described in Schedule 3.14, the Company and, after
giving effect to the Closing and the LLC Contribution, the LLC, has exclusive
ownership of, or exclusive license to use, all patent, copyright, trade secret,
trademark, trade name, service mark, formulas, designs, inventions or other
proprietary rights (including, without limitation, all rights in and to the name
"Essex Investment Management Company") (collectively, "Intellectual Property")
used in the business of the Company as presently conducted. Except as set forth
in Schedule 3.14, all of the rights of the Company in such Intellectual Property
are freely transferable. There are no claims or demands of any other person or
entity pertaining to any of such Intellectual Property and no proceedings have
been instituted, or are pending or, to the knowledge of the Company and the
Majority Stockholders, threatened, which challenge the rights of the Company or
the LLC in respect thereof. The Company and, after giving effect to the Closing
and the LLC Contribution, the LLC, has the right to use, free and clear of
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any claims or rights of other persons, all customer lists (subject to applicable
confidentiality restrictions), investment or other processes, computer software
(other than rights of other Persons in computer software that is generally
available to the public in the retail marketplace), systems, data compilations,
research results and other information required for or incident to its services
or its business as presently conducted.
(b) The Company has no, nor does it license or use any patents,
patent applications, trademarks, trademark applications and registrations and
registered copyrights. All other items of Intellectual Property which are
material to the business or operations of the Company and, after giving effect
to the Closing and the LLC Contribution, the LLC, are listed in Schedule 3.14.
(c) All licenses or other agreements under which the Company is
granted rights in items of Intellectual Property which are material to the
business or operations of the Company and, after giving effect to the Closing
and the LLC Contribution, the LLC, are listed in Schedule 3.14. All said
licenses or other agreements are in full force and effect, there is no material
default by any party thereto, and, except as set forth in Schedule 3.14, all of
the rights of the Company thereunder are freely assignable. To the knowledge of
the Company and the Majority Stockholders, the licensors under said licenses and
other agreements have and had all requisite power and authority to grant the
rights purported to be conferred thereby. True and complete copies of all such
licenses or other agreements, and any amendments thereto, have been provided to
AMG.
(d) The Company has not granted rights to others in Intellectual
Property owned or licensed by the Company.
(e) The Company has not made any valuable proprietary or non-public
information of the Company available to any person other than employees of the
Company except pursuant to written agreements requiring the recipients to
maintain the confidentiality of such information and appropriately restricting
the use thereof. The Company has no knowledge of any infringement by others of
any Intellectual Property rights of the Company.
(f) The present business, activities and products of the Company,
and, after giving effect to the LLC Contribution and the Closing, the LLC do not
infringe any rights of any other person in Intellectual Property. No proceeding
charging the Company with infringement of any Intellectual Property of any other
person or entity has been filed or, to the knowledge of the Company and the
Majority Stockholders, is threatened to be filed. The Company is not making
unauthorized use of any confidential information or trade secrets of any person,
including without limitation, any former employer of any past or present
employee of the Company. Except as set forth in Schedule 3.14, neither the
Company nor, to the knowledge of the Company and the Majority Stockholders, any
of the Company's employees have any agreements or arrangements with any persons
other than the Company related to confidential information or trade secrets of
such persons or restricting any such employee's ability to engage in business
activities of any nature. The activities of the Company's
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employees on behalf of the Company do not violate any such agreements or
arrangements known to the Company.
3.15 Contracts. Except for contracts, commitments, plans, agreements and
licenses described in Schedule 3.3, Schedule 3.6(a), Schedule 3.7, Schedule
3.14, Schedule 3.15 or Schedule 3.24 (true and complete copies of which have
been made available or delivered to AMG), neither the Company nor the LLC is a
party to or subject to any:
(a) investment management or investment advisory or sub-advisory
contract or agreement or any other contract or agreement for the provision of
investment management or other similar services;
(b) plan, contract or agreement providing for bonuses, pensions,
options, stock (or other beneficial interest) purchases (or other securities or
phantom equity purchases), deferred compensation, retirement payments, profit
sharing or the like;
(c) employment contract or agreement or contract or agreement for
services which is not terminable at will by the Company (and, after giving
effect to the Closing and the LLC Contribution, the LLC) without liability for
any penalty or severance payment;
(d) contract or agreement for the purchase of any assets, material
or equipment except purchase orders in the ordinary course for less than $50,000
each, such contract, agreements and orders not exceeding $250,000 in the
aggregate;
(e) other contract or agreement creating any obligations of the
Company or the LLC of more than $100,000 (in the aggregate) not specifically
disclosed elsewhere under this Agreement;
(f) contract or agreement not made in the ordinary course of
business (including, without limitation, any contract for the sale of all or any
material portion of the assets of the Company or any contract for the purchase
of all or any material portion of the assets of any other entity) other than the
LLC Contribution Agreement and the agreements contemplated thereby;
(g) contract or agreement with any investment or research
consultant, solicitor or sales agent;
(h) contract or agreement containing covenants limiting the freedom
of the Company or the LLC (or their respective Affiliates) to compete in any
line of business or with any person or entity;
(i) license contract or agreement (as licensor or licensee);
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(j) contract or agreement providing for the borrowing or lending of
money, and neither the Company nor the LLC has any obligations: (i) for borrowed
money, (ii) evidenced by bonds, debentures, notes or similar instruments, (iii)
to pay the deferred purchase price of property or services, (iv) under leases
that would, in accordance with GAAP, appear on the balance sheet of the lessee
as a liability, (v) secured by a Claim, (vi) in respect of letters of credit, or
bankers acceptances, contingent or otherwise, or (vii) in respect of any
guaranty or endorsement or other obligations to be liable for the debts of
another person or entity; or
(k) other material contract or agreement to which the Company or the
LLC is a party or by which either of them is bound.
Each of the contracts or agreements described in Schedule 3.3, Schedule
3.6(a), Schedule 3.7, Schedule 3.14, Schedule 3.15 or Schedule 3.24 is valid and
effective in accordance with its respective terms, and there is not, under any
such contract or agreement, an existing material breach or event which, with the
giving of notice or the lapse of time or both, would become such a breach. The
Company has complied and is in compliance with the client's guidelines and
restrictions set forth in any contract described in Schedule 3.7, including,
without limitation, any limitation set forth in the applicable prospectus,
offering memorandum or marketing material for a fund or other collective
investment vehicle or governing documents for any client. In the event the
consents set forth in Schedule 3.5, Schedule 3.6(a), and Schedule 3.7 are
obtained, and after giving effect to the LLC Contribution and the Closing, each
such contract will remain valid and effective in accordance with its respective
terms, and the LLC will be entitled to all rights and remedies thereunder to
which the Company is entitled on the date hereof, or such contract or agreement
will have been replaced by a new contract or agreement with the same party or
parties on terms at least as favorable to the LLC as the terms of the present
contract or agreement are to the Company. Neither the Company nor the LLC is
bound by any agreement, contract or arrangement which could reasonably be
expected to have a Material Adverse Effect on the Company, the LLC or AMG.
3.16 Litigation. There is no litigation or legal (or other) action, suit,
proceeding or investigation at law or in equity, or before any federal, state,
municipal or other governmental department, commission, bureau, board, agency or
instrumentality, domestic or foreign (including, without limitation, any
voluntary or involuntary proceedings under the Bankruptcy Code pending or, to
the knowledge of the Majority Stockholders, threatened, against the Company or
any action, suit, proceeding or investigation under any federal or state
securities law, rule or regulation), in which the Company or the LLC or any
Stockholder or officer, director, stockholder, member or employee thereof is
engaged, or with which any of them is threatened, in connection with the
business, affairs, properties or assets of the Company or the LLC, or which
might call into question the validity or hinder the enforceability or
performance of this Agreement, or of the other agreements, documents and
instruments contemplated hereby and the transactions contemplated hereby and
thereby or would reasonably be expected to have a Material Adverse Effect on the
Company. There are no proceedings pending, or to the knowledge of the Company or
any of the Majority Stockholders, threatened, relating to the
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termination of, or limitation of, the rights of the Company (and, after giving
effect to the Closing and the LLC Contribution, the LLC) under its registration
under the Advisers Act, as an investment adviser, or any similar or related
rights under any registrations or qualifications with various states or other
jurisdictions, or under any other Investment Laws and Regulations.
3.17 Compliance with Laws. Each of the Company and the LLC is, and at all
times has been, in material compliance with all laws and governmental rules and
regulations, domestic or foreign, including, without limitation, the Advisers
Act, the Commodity Exchange Act, ERISA, the Exchange Act, the Investment Company
Act, and the Securities Act and the regulations promulgated under each of them;
the rules and regulations of self-regulatory organizations including, without
limitation, the NASD and each applicable exchange (as defined under the Exchange
Act); and all other foreign, federal or state securities laws and regulations
applicable to the business or affairs or properties or assets of the Company and
the LLC (collectively "Investment Laws and Regulations"). None of the Company,
the LLC or any Majority Stockholder or any officer, director, member, employee
or stockholder of the Company or the LLC, is in default with respect to any
judgment, order, writ, injunction, decree, demand or assessment issued by any
court or any foreign, federal, state, municipal or other governmental agency,
board, commission, bureau, instrumentality or department, domestic or foreign,
or by any self-regulatory authority relating to the business or affairs of the
Company, the LLC or the transactions contemplated hereby or which could give
rise to an affirmative answer to any of the questions in Item 11, Part I of the
Form ADV of the Company or the LLC. None of the Company or the LLC, nor any
officer, director, member, employee or stockholder of the Company or the LLC,
has been or is charged with or, to the knowledge of the Company or any of the
Majority Stockholders, threatened with, or under investigation with respect to,
any violation of any provision of foreign, federal, state, municipal or other
law or any administrative rule or regulation, domestic or foreign including,
without limitation, any Investment Laws and Regulations, relating to the
business or affairs of the Company, the LLC or the transactions contemplated
hereby or which could give rise to an affirmative answer to any of the questions
in Item 11, Part I of the Form ADV of the Company or the LLC.
3.18 Business; Registrations.
(a) The Company is and has, since its inception, been engaged solely
in the business of providing Investment Management Services. The Company does
not provide Investment Management Services to (i) any issuer that is an
investment company (within the meaning of the Investment Company Act) other than
the Mutual Funds and the Foreign Funds and the clients listed in Schedule
3.18(a), (ii) any issuer that would be an investment company (within the meaning
of the Investment Company Act) but for the exemptions contained in Section
3(c)(1), Section 3(c)(7), the final clause of Section 3(c)(3) or the third or
fourth clauses of Section 3(c)(11) of the Investment Company Act, other than the
Private Funds (as such term is defined in Section 13.1 hereof), or (iii) any
issuer other than the Mutual Funds and the Foreign Funds and the clients listed
in Schedule 3.18(a) that is or is required to be registered under the laws of
the appropriate securities regulatory authority in the jurisdiction in which the
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issuer is domiciled (other than the United States or the states thereof), which
is or holds itself out as engaged primarily in the business of investing,
reinvesting or trading in securities.
(b) The Company is and has, since its inception, been duly
registered as an investment adviser under the Advisers Act. The Company is duly
registered, licensed and qualified as an investment adviser in all jurisdictions
where such registration, licensing or qualification is required in order to
conduct its business and where the failure to be so registered, licensed or
qualified could reasonably be expected to have a Material Adverse Effect on the
Company or the LLC. The Company is in compliance with all foreign, federal and
state laws requiring registration, licensing or qualification as an investment
adviser and has currently effective notice filings in each of the jurisdictions
listed in Schedule 3.18(b). The Company has delivered to AMG, true and complete
copies of its most recent Form ADV, as amended to date, and has made available
copies of all foreign and state registration forms, likewise as amended to date.
The information contained in such forms was true and complete at the time of
filing and the Company has made all amendments to such forms as it is required
to make under any applicable laws. Neither the Company nor, to the knowledge of
the Company and the Majority Stockholders, any person "associated" (as defined
under the Advisers Act) with the Company, has been convicted of any crime or is
or has engaged in any conduct that would be a basis for denial, suspension or
revocation of registration of an investment adviser under Section 203(e) of the
Advisers Act or would need to be disclosed pursuant to Rule 206(4)-4(b)
thereunder, and to the knowledge of the Company and the Majority Stockholders,
there is no proceeding or investigation that is reasonably likely to become the
basis for any such disqualification, denial, suspension or revocation. The
Company and each of its investment adviser representatives (as such term is
defined in Rule 203A-3(a) under the Advisers Act) has, and after giving effect
to the Closing and the LLC Contribution, the LLC and each of such
representatives will have, all permits, registrations, licenses, franchises,
certifications and other approvals (collectively, the "Licenses") required from
foreign, federal, state or local authorities in order for it to conduct the
businesses presently conducted by the Company in the manner presently conducted
by the Company. Neither the Company nor the LLC is subject to any limitation
imposed in connection with one or more of the Licenses which could reasonably be
expected to have a Material Adverse Effect on the Company, the LLC or AMG. The
Company is not a "broker" or "dealer" within the meaning of the Exchange Act, or
a "commodity pool operator" or "commodity trading adviser" within the meaning of
the Commodity Exchange Act. None of the Company or its officers and employees is
required to be registered as a broker or dealer, a commodity trading adviser, a
commodity pool operator, a futures commission merchant, an introducing broker, a
registered representative or associated person, a counseling officer, an
insurance agent, a sales person or in any similar capacity with the SEC, the
Commodity Futures Trading Commission, the National Futures Association, the NASD
or the securities commission of any state or any self-regulatory body. Except as
described on Schedule 3.18(b), no person other than a full-time employee of the
Company renders Investment Management Services to or on behalf of, or solicits
clients with respect to, the provision of Investment Management Services by, the
Company.
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(c) The Company has no investment adviser representatives (as such
term is defined in Rule 203A-3(a) under the Advisers Act).
(d) The only place of business (within the meaning of Rule 203A-3(b)
under the Advisers Act) of the Company is its principal office in Boston,
Massachusetts.
3.19 Insurance. The Company has in full force and effect such insurance as
is customarily maintained by companies of similar size in the same or a similar
business, with respect to its businesses, properties and assets (including,
without limitation, errors and omissions liability insurance), and all bonds
required by ERISA and by any contract to which the Company is a party, all as
listed in Schedule 3.19. The Company is not in material default under any such
insurance policy. After giving effect to the Closing and the LLC Contribution,
each such insurance policy or equivalent policies will be in full force and
effect, with the LLC as the sole owner and beneficiary of each such policy.
3.20 Powers of Attorney. Except as set forth on Schedule 3.3, none of the
Company, the LLC or any Majority Stockholder or, to the knowledge of the Company
and the Majority Stockholders, any other Stockholder has any outstanding power
of attorney relating to the business or affairs or capital stock of the Company.
3.21 Finder's Fee. Except for fees to McDaniels & Co. (which fees have
been disclosed to AMG and will be paid by from the escrow established under the
Escrow Agreement), none of the Company, the LLC or any Stockholder has incurred
or become liable for any broker's commission or finder's fee relating to or in
connection with the transactions contemplated by this Agreement.
3.22 Corporate Records; Copies of Documents. The record books of the
Company accurately record all corporate action taken by its respective
stockholders and board of directors and committees and true and complete copies
of the originals of such documents have been made available to AMG for review.
The Company has made available for inspection and copying by AMG and its counsel
true and correct copies of all documents referred to in this Agreement or in the
Schedules delivered to AMG in connection herewith.
3.23 Transactions with Interested Persons. Neither the Company, the LLC,
nor any Stockholder, member, officer, supervisory employee or director of the
Company or the LLC or, to the knowledge of the Company or any of the
Stockholders, any of their respective spouses or family members, is a party to
any material transaction or material contract or arrangement with the Company or
the LLC, or owns directly or indirectly on an individual or joint basis any
interest (excluding passive investments in the shares of any enterprise which
are publicly traded provided his or her holdings therein, together with any
holdings of his or her Affiliates and family members, are less than five percent
(5%) of the outstanding shares of comparable interest in such entity) in, or
serves as an officer or director or in another similar capacity of, any
competitor or client of the Company, or any organization which has a material
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contract or arrangement with the Company or the LLC (in each case, other than as
expressly contemplated hereby).
3.24 Employee Benefit Programs. [Assumes no Defined Benefit Plans]
(a) Schedule 3.24 hereto lists every Employee Program (as defined
below) that has been maintained (as defined below) by the Company at any time
during the three-year period ending on the date of the Closing.
(b) Each Employee Program which has ever been maintained by the
Company and which has at any time been intended to qualify under Section 401(a)
or 501(c)(9) of the Code has received a favorable determination or approval
letter from the IRS regarding its qualification under such section and has in
fact, been qualified under the applicable section of the Code from the effective
date of such Employee Program through and including the Closing (or, if earlier,
the date that all of such Employee Program's assets were distributed). No event
or omission has occurred which would cause any such Employee Program to lose its
qualification under the applicable Code section.
(c) The Company does not know and has no reason to know, of any
failure of any party to comply in any material respect with any laws applicable
to the Employee Programs that have been maintained by the Company. With respect
to any Employee Program ever maintained by the Company, there has occurred no
"prohibited transaction," as defined in Section 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Code,
or breach of any duty under ERISA or other applicable law (including, without
limitation, any health care continuation requirements or any other tax law
requirements, or conditions to favorable tax treatment, applicable to such
plan), which could result, directly or indirectly, in any taxes, penalties or
other liability to Merger Sub, the Company, the LLC or AMG. No litigation,
arbitration, or governmental administrative proceeding (or investigation) or
other proceeding (other than those relating to routine claims for benefits) is
pending or threatened with respect to any such Employee Program.
(d) Except as set forth on Schedule 3.24, neither the Company nor
any ERISA Affiliate (as defined below) (i) has ever maintained any Employee
Program which has been subject to title IV of ERISA (including, but not limited
to, any Multiemployer Plan (as defined below)) or (ii) has ever provided health
care or any other non-pension benefits to any employees after their employment
is terminated (other than as required by part 6 of subtitle B of title I of
ERISA) or has ever promised to provide such post-termination benefits.
(e) With respect to each Employee Program maintained by the Company
within the three (3) years preceding the Closing, complete and correct copies of
the following documents (if applicable to such Employee Program) have previously
been delivered to AMG: (i) all documents embodying or governing such Employee
Program, and any funding medium for the Employee Program (including, without
limitation, trust agreements) as they may have been amended; (ii) the most
recent IRS determination or approval letter with respect to such
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Employee Program under Code Sections 401 or 501(c)(9), and any applications for
determination or approval subsequently filed with the IRS; (iii) the three (3)
most recently filed IRS Forms 5500, with all applicable schedules and
accountants' opinions attached thereto; (iv) the summary plan description for
such Employee Program (or other descriptions of such Employee Program provided
to employees) and all modifications thereto; (v) any insurance policy (including
any fiduciary liability insurance policy) related to such Employee Program; (vi)
any documents evidencing any loan to an Employee Program that is a leveraged
employee stock ownership plan; and (vii) all other materials reasonably
necessary for AMG to perform any of its responsibilities with respect to any
Employee Program subsequent to the Closing (including, without limitation,
health care continuation requirements).
(f) Each Employee Program listed on Schedule 3.24 may be amended,
terminated, modified or otherwise revised by the Company, including the
elimination of any and all future benefit accruals under any Employee Program.
(g) For purposes of this section:
(i) "Employee Program" means (A) all employee benefit plans
within the meaning of ERISA Section 3(3), including, but not limited to,
multiple employer welfare arrangements (within the meaning of ERISA
Section 3(4)), plans to which more than one unaffiliated employer
contributes and employee benefit plans (such as foreign or excess benefit
plans) which are not subject to ERISA; and (B) all stock option plans,
bonus or incentive award plans, severance pay policies or agreements,
deferred compensation agreements, supplemental income arrangements,
vacation plans, and all other employee benefit plans, agreements, and
arrangements not described in (A) above. In the case of an Employee
Program funded through an organization described in Code Section
501(c)(9), each reference to such Employee Program shall include a
reference to such organization.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides (or has promised to provide)
benefits under such Employee Program, or has any obligation (by agreement
or under applicable law) to contribute to or provide benefits under such
Employee Program, or if such Employee Program provides benefits to or
otherwise covers employees of such entity, or their spouses, dependents,
or beneficiaries.
(iii) An entity is an "ERISA Affiliate" of the Company if it
would have ever been considered a single employer with the Company under
ERISA Section 4001(b) or part of the same "controlled group" as the
Company for purposes of ERISA Section 302(d)(8)(C).
(iv) "Multiemployer Plan" means a (pension or non-pension)
employee benefit plan to which more than one employer contributes and
which is maintained pursuant to one or more collective bargaining
agreements.
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3.25 Directors, Officers and Employees.
(a) Schedule 3.25(a) contains a true and complete list of all
current directors and officers of the Company. In addition, Schedule 3.25(a)
contains a list of all managers and employees of, and consultants to, the
Company who, individually, have received or are scheduled to receive
compensation from the Company and/or the LLC for the fiscal year ending November
30, 1997, in excess of $75,000. In each case such Schedule includes the current
job title and AMG has been separately provided with the aggregate annual
compensation of each such individual. To the knowledge of the Company and the
Majority Stockholders, each employee listed in Schedule 3.25(a) hereto is in
good health.
(b) The Company and, after giving effect to the LLC Contribution,
the LLC, employs less than sixty (60) full-time employees and five (5) part-time
employees and generally enjoys good employer-employee relationships. Except as
set forth in Schedule 3.25(b) (or Schedule 3.24), neither the Company nor the
LLC has any obligation, contingent or otherwise, under (a) any employment,
collective bargaining or other similar labor agreement, (b) any written or oral
agreement containing severance or termination pay arrangements, (c) any deferred
compensation agreement, retainer or consulting arrangements, (d) any pension or
retirement plan, any bonus or profit-sharing plan, any stock option or stock
purchase plan, or (e) any other employee contract or non-terminable (whether
with or without penalty) employment arrangement (each an "Employment
Arrangement"). The Company is not in default with respect to any material term
or condition of any Employment Arrangement, nor will the Closing or the LLC
Contribution (or the transactions contemplated hereby or thereby) result in any
such default, including, without limitation, after the giving of notice, lapse
of time or both. Neither the Company nor the LLC is delinquent in payments to
any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it to the date hereof or
amounts required to be reimbursed to such employees. Upon termination of the
employment of any of said employees, none of the Company, Merger Sub, the LLC or
AMG could, by reason of the transactions contemplated by this Agreement or
anything done prior to the Closing, be liable to any of said employees for
so-called "severance pay" or any other payments except as set forth in the
Restated LLC Agreement. Neither the Company nor the LLC has made any payments,
is obligated to make any payments, or is a party to any agreement that under
certain circumstances could obligate the Company, Merger Sub, the LLC or AMG to
make any payments that would be "parachute payments" within the meaning of the
Code or would not be deductible under Section 280G of the Code. Except as
described in Schedule 3.25(b), the Company does not have any policy, practice,
plan or program of paying severance pay or any form of severance compensation in
connection with the termination of employment. Each of the Company and the LLC
is in compliance in all material respects with all applicable laws and
regulations respecting labor, employment, fair employment practices, work place
safety and health, terms and conditions of employment, and wages and hours.
There are no charges of employment discrimination or unfair labor practices
against or involving the Company. There are no grievances, complaints or charges
that could have an adverse effect on the Company, Merger Sub, the LLC or AMG
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or the conduct of their respective businesses and that have actually been filed
against the Company under any dispute resolution procedure, and there is no
arbitration or similar proceeding pending and no claim therefor has been
asserted. The Company has in place all employee policies required by applicable
laws, rules and regulations (except to the extent failure to have such policy
would not reasonably be expected to have a Material Adverse Effect on the
Company), and there have been no material violations or alleged violations of
any of such policies. The Company has not received any notice indicating that
any of its employment policies or practices is currently being audited or
investigated by any foreign, federal, state or local government agency. Each of
the Company and the LLC is, and at all times since November 6, 1986 has been, in
compliance with the requirements of the Immigration Reform Control Act of 1986,
as amended.
3.26 Non-Foreign Status. No Stockholder is a "foreign person" within the
meaning of Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
3.27 Transfer of Shares. Except as described in Schedule 3.27, no holder
of stock of the Company has at any time transferred any of such stock to any
employee of the Company, which transfer constituted or could be viewed as
compensation for services rendered to the Company by said employee.
3.28 Stock Repurchase. Except as described in Schedule 3.28, neither the
Company nor the LLC has redeemed or repurchased any of its capital stock or
interests since the date of the Base Balance Sheet.
3.29 Code of Ethics. The Company has adopted a written policy regarding
insider trading, a Code of Ethics which complies with all applicable provisions
of Section 204A of the Advisers Act and a personal trading policy which complies
with all applicable provisions of Rule 17j-1 under the Investment Company Act,
copies of which have been delivered to AMG prior to the date hereof. All
employees of the Company have executed acknowledgments that they are bound by
the provisions of such Code of Ethics, insider trading policy and personal
trading policy. The policies of the Company with respect to avoiding conflicts
of interest are as set forth in the Company's most recent Form ADV or
incorporated by reference therein. There have been no material violations or
allegations of material violations of such Code of Ethics, insider trading
policy, conflicts policy or personal trading policy.
3.30 Certain Representations and Warranties as to Collective
Investment Vehicles.
(a) True, correct and complete copies of all of the current
investment advisory agreements and distribution or underwriting contracts,
administrative services and other services agreements, if any, and
organizational and offering documents, pertaining to each of the Private Funds
and the Foreign Funds: (i) have been provided to AMG prior to the date hereof
and (ii) are in full force and effect. Such offering materials as of the dates
as of which they were prepared and distributed did not contain an untrue
statement of a material fact
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or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) Each of the Private Funds and the Foreign Funds is duly
organized, validly existing and in good standing in the jurisdiction in which it
is organized and has all requisite power and authority to conduct its business
in the manner and in the places where such business is currently conducted. Each
Private Fund and each Foreign Fund is and has, since its inception, been engaged
solely in the business of an investment company. Each Private Fund and each
Foreign Fund is and has, since its inception, been in compliance with all
foreign, federal and state laws requiring registration, licensing or
qualification as an investment company and all Investment Laws and Regulations.
(c) AMG has been furnished true, correct and complete copies of the
audited financial statements, prepared in accordance with GAAP applied
consistently during the periods covered thereby, of each Private Fund and each
Foreign Fund for the past three fiscal years (or such shorter period as such
Private Fund or Foreign Fund shall have been in existence), and unaudited
financial statements, prepared in accordance with GAAP applied consistently
during the periods covered thereby, of each Private Fund and each Foreign Fund
for the first nine months of its most recent fiscal year. Each Private Fund's
and Foreign Fund's fiscal year end and/or nine-month period financial statements
is hereinafter referred to as a "Fund Financial Statement." Each of the Fund
Financial Statements is consistent with the books and records of the applicable
Private Fund or Foreign Fund, and presents fairly in all material respects the
consolidated financial condition of such Private Fund or Foreign Fund in
accordance with GAAP applied consistently during the periods covered thereby
(except that the financial statements for the period need not include footnote
disclosure or related statements of cash flows and stockholders' equity) at the
respective date of such Fund Financial Statement and the results of operations
and cash flows for the respective periods indicated, except in the case of the
interim financial statements which are subject to normal year-end adjustments
which in the aggregate are not material. The Fund Financial Statements reflect
and disclose all material changes in accounting principles and practices adopted
by each of the Private Funds and the Foreign Funds during the periods covered by
each Fund Financial Statement. The books of account of each of the Private Funds
and the Foreign Funds fairly reflect their respective transactions. None of the
Private Funds has any direct or indirect liabilities other than: (i) liabilities
fully and adequately reflected on the balance sheets contained in the Fund
Financial Statements, and (ii) liabilities incurred since the date of the Fund
Financial Statements and incurred in the ordinary course of business consistent
with past practices.
(d) There are no restrictions imposed pursuant to any Investment
Laws and Regulations, consent judgments or orders of the SEC or any other
regulatory body on or with regard to any of the Private Funds or the Foreign
Funds. Since inception, each of the Private Funds has been excluded from the
definition of an investment company under the Investment Company Act by virtue
of Section 3(c)(1) thereof or Section 3(c)(7) thereof and none of the Foreign
Funds has been in violation of Section 7(d) under the Investment Company Act.
Since its inception, each Private Fund and Foreign Fund has been duly registered
or licensed and in
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good standing under the laws of each jurisdiction in which such qualification is
necessary, except where the failure to be duly registered and in compliance
could not reasonably be expected to have a Material Adverse Effect on the
respective Private Fund (or Foreign Fund, as applicable) or the Company.
(e) All interests of each of the Private Funds and the Foreign Funds
were sold pursuant to a valid and effective exemption from registration under
the Securities Act and have been duly authorized and are validly issued. Each of
the investments of the Private Funds and the Foreign Funds has been made in
accordance with the respective investment policies and restrictions in effect at
the time the investments were made and at all times when the investments were
held.
(f) All consent solicitation materials to be prepared for use by the
Private Funds in connection with the transactions contemplated by this Agreement
at the time such information is provided or used, as then amended or
supplemented, and any information disseminated in respect of the transactions
contemplated hereby at the time such information is disseminated, in each case,
will be accurate and complete and will not contain any untrue statement of a
material fact, or omit to state any material fact (i) required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (ii) necessary to
correct any statement in any earlier communication that has become false or
misleading.
(g) There is no litigation or legal (or other) action, suit,
proceeding or investigation at law or in equity pending or, to the knowledge of
the Company and the Majority Stockholders, threatened in any court or before or
by any governmental agency or instrumentality, department, commission, board,
bureau or agency, or before any arbitrator, by or against any of the Private
Funds or the Foreign Funds, or any officer or director thereof. There are no
judgements, injunctions, orders or other judicial or administrative mandates
outstanding against or affecting any of the Private Funds or the Foreign Funds
or any officer or director thereof.
(h) Each of the Private Funds and the Foreign Funds has timely filed
all Tax returns and reports (including information returns, declarations and
reports) (collectively, "returns") required to be filed by it with any Taxing
Authorities for taxable periods ending after December 31, 1990 and has paid, or
withheld and paid over, all Taxes which were shown to be due on the such
returns. The information contained in such returns is true, correct and
complete. Each of the Private Funds has, since its inception, been classified as
a partnership for state and federal income tax purposes. None of the Foreign
Funds is engaged in the conduct of a trade or business (within the meaning of
the Code). Each Foreign Fund is a passive foreign investment company (within the
meaning of the Code) and is not a controlled foreign corporation (within the
meaning of the Code). Each of the Foreign Funds has in effect a QEF election.
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SECTION 4. SEVERAL REPRESENTATIONS AND WARRANTIES OF MAJORITY
STOCKHOLDERS.
As a material inducement to AMG and Merger Sub to enter into this
Agreement and consummate the transactions contemplated hereby, each Majority
Stockholder hereby severally makes to AMG each of the representations and
warranties set forth in this Section 4 with respect to such Stockholder. After
the Closing, no Stockholder shall have any right of indemnity or contribution
from Merger Sub, the Company or the LLC (or any other right against the Company
or the LLC) with respect to the breach of any representation or warranty by the
Company or the Majority Stockholders hereunder.
4.1 Company Shares. Such Majority Stockholder owns of record and
beneficially the number of the Company Shares set forth opposite such Majority
Stockholder's name in Schedule 1.7. Such Company Shares are duly authorized,
validly issued, fully paid, non-assessable and free and clear of any and all
Claims (including, without limitation, claims under Article 8 of the
Massachusetts Uniform Commercial Code). The Company Shares set forth opposite
such Majority Stockholder's name in Schedule 1.7 are, except as reflected in
Schedule 3.3, the only shares of capital stock held by such Majority Stockholder
or with respect to which such Majority Stockholder has any rights in the
Company.
4.2 Authority. Such Majority Stockholder has full right, authority, power
and capacity to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by or on behalf of such Majority
Stockholder pursuant to, or as contemplated by, this Agreement and to carry out
the transactions contemplated hereby and thereby. This Agreement and each
agreement, document and instrument executed and delivered by such Majority
Stockholder pursuant to this Agreement constitutes, or when executed and
delivered will constitute, a valid and binding obligation of such Majority
Stockholder, enforceable in accordance with its respective terms, except as
enforceability may be restricted, limited or delayed by applicable bankruptcy or
other laws affecting creditors' rights generally. Such Majority Stockholder has
full power and authority to transfer, sell and deliver the Company Shares to AMG
pursuant to this Agreement. The execution, delivery and performance of this
Agreement and each such agreement, document and instrument:
(i) does not and will not violate any laws of the United
States or any state or other jurisdiction applicable to such Majority
Stockholder, or require such Majority Stockholder to obtain any approval,
consent or waiver from, or make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made; and
(ii) does not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of, any agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award to which such Majority Stockholder is a
party or by which the property of such Majority Stockholder
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is bound or affected, or result in the creation or imposition of any Claim
on any assets of the Company or the LLC or on Company Shares owned by such
Majority Stockholder.
4.3 Ownership of LLC Interests. The LLC Interests shown as owned by each
Majority Stockholder in the records set forth in Schedule 3.4(b)(i) and, as of
the Closing, Schedule 3.4(b)(ii), constitute all the interests in the LLC or
rights to purchase interests in LLC which are held by such Person, directly or
indirectly.
4.4 Finder's Fee. Except as set forth in Section 3.21, such Majority
Stockholder has not incurred or become liable for any broker's commission or
finder's fee relating to or in connection with the transactions contemplated by
this Agreement.
4.5 Investment Advisory Representation. Except for his own account and
advice given in a director or trustee capacity to a charitable organization
(which positions and organizations are set forth on Schedule 4.5) or given to
such Majority Stockholder's spouse, children, grandchildren, parents and
siblings and which such Stockholder is managing without a fee or any other
remuneration, such Stockholder does not provide investment advisory or
investment management services to any person or entity, other than on behalf of
the Company (and, after giving effect to the Closing and the LLC Contribution,
the LLC), pursuant to an investment advisory agreement between the Company (and,
after giving effect to the Closing and the LLC Contribution, the LLC) and a
client thereof.
4.6 Agreements.
(a) Such Majority Stockholder is not a party to any employment,
non-competition, trade secret or confidentiality agreement, arrangement or
understanding with any party other than the Company or the LLC. There are no
agreements or arrangements not contained herein or disclosed in a Schedule
hereto, to which such Majority Stockholder is a party relating to the business
of the Company or the LLC or to such Majority Stockholder's rights and
obligations as a stockholder, member, director, officer or employee of the
Company or the LLC.
(b) Such Majority Stockholder does not own, directly or indirectly,
on an individual or joint basis, any interest (excluding passive investments in
the shares of any enterprise which are publicly traded, provided his or her
holdings therein, together with any holdings of his or her Affiliates and family
members, are less than five percent (5%) of the outstanding shares of comparable
interest in such entity) in, or serve as an officer or director of, any
organization which has a contract or arrangement with the Company or the LLC or
which could be considered a competitor of the Company or the LLC. The execution,
delivery and performance of this Agreement will not violate or result in a
default or acceleration of any obligation under any contract, agreement,
indenture or other instrument involving the Company or the LLC to which such
Majority Stockholder is a party.
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4.7 Employment Data. Such Majority Stockholder's (i) date of birth, and
(ii) date of commencement of employment with the Company are both accurately
reflected in Schedule 4.7.
4.8 Good Health. Each of the Majority Stockholders represents that he is
in good health and has provided AMG with a letter from his doctor to such
effect. Each of the Stockholders listed on Schedule 4.8 has provided
representatives of AMG's insurance broker with true and complete responses to
all questions or inquiries of such representatives.
SECTION 5. COVENANTS OF THE COMPANY AND THE MAJORITY
STOCKHOLDERS.
5.1 Making of Covenants and Agreements. The Company and the Majority
Stockholders jointly and severally hereby make the covenants and agreements set
forth in this Section 5 and the Majority Stockholders agree to cause the Company
and the LLC to comply with such agreements and covenants. After the Closing, no
Stockholder shall have any right of indemnity or contribution from Merger Sub,
the Company or the LLC (or any other right against Merger Sub, the Company or
the LLC) with respect to the breach of any covenant or agreement of the Company
or the Majority Stockholders hereunder.
5.2 Client Consents.
(a) As soon as reasonably practicable after the date hereof, but in
any event on or prior to January 22, 1998, the Company shall notify each of its
clients of the transactions contemplated hereby and by the other agreements,
documents and instruments contemplated hereby. Such notice shall be in the form
of Exhibit 5.2A with respect to those clients whose contracts require
affirmative written consent (by their terms or under applicable law) for their
assignment, in the form of Exhibit 5.2B with respect to those clients whose
contracts do not require affirmative written consent (by their terms or under
applicable law) for their assignment, but in the form of Exhibit 5.2C with
respect to those clients whose contracts terminate (by their terms or under
applicable law) upon their assignment (in each case, with such changes thereto
as may be agreed to by AMG in writing.
(b) On or prior to February 22, 1998, the Company shall send to each
client who was sent, but who has not by such date returned, a notice in the form
of Exhibit 5.2B, countersigned indicating approval of the transactions
contemplated hereby, a second notice in the form of Exhibit 5.2D.
(c) With respect to the Private Funds, the Company and the Majority
Stockholders shall use all commercially reasonable efforts to obtain such
consents as may be necessary or appropriate and satisfactory to AMG to permit
consummation of the transactions contemplated hereby.
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(d) With respect to the Foreign Fund, the Company and the Majority
Stockholders shall use all commercially reasonable efforts to obtain such
Consents from regulatory authorities or investors as may be necessary or
appropriate and satisfactory to AMG to permit consummation of the transactions
contemplated hereby.
(e) With respect to the Mutual Fund, the Company and the Majority
Stockholders shall use all commercially reasonable efforts to cause the Board of
Trustees of each of the Mutual Funds to approve the investment advisory
agreement with the LLC to be in effect at and after the Closing and to provide
such information in connection therewith to the Shareholders of the Mutual Funds
as may be required under any applicable order or regulation of the SEC or any
federal or state securities laws.
(f) The Company and the Stockholders shall use commercially
reasonable efforts to, and the Stockholders shall use commercially reasonable
efforts to cause the Company to, obtain Consents from their clients (or, in the
case of clients whose contracts terminate upon their assignment, new contracts
on substantially equivalent terms) in the manner contemplated by this Section
5.2 and Exhibit 5.2A, Exhibit 5.2B, Exhibit 5.2C and Exhibit 5.2D.
5.3 Authorizations.
(a) The LLC shall, and the Company and each of the Stockholders
shall cause the LLC to, (i) file, as soon as practicable after the Closing, and
in any event within three (3) business days of the Closing, with the SEC, a
Uniform Application for Investment Adviser Registration on Form ADV to register
the LLC as an investment adviser under the Advisers Act, and (ii) make
appropriate additional filings with respect to its investment advisory status as
soon as practicable after the Closing with the Commonwealth of Massachusetts and
in each other jurisdiction listed on Schedule 3.18(b).
(b) The LLC will, and the Company and each of the Stockholders will
use commercially reasonable efforts to cause the LLC and each of its employees
to, obtain all authorizations, consents, orders, approvals and Licenses of
federal, state and local regulatory bodies and officials that may be or become
necessary for their respective execution and delivery of, and the performance of
their respective obligations pursuant to, this Agreement and the other
agreements, documents and instruments contemplated hereby, and for the LLC to
conduct the business presently being conducted by the Company.
5.4 Authorization from Others. The Majority Stockholders, the Company and
the LLC will use commercially reasonable efforts to obtain all authorizations,
consents, approvals, permits and Licenses of others required to permit the
consummation by the Majority Stockholders, the Company and the LLC of the
transactions contemplated by this Agreement.
5.5 Status. The Company shall acquire all Company Shares held by the
Persons listed on Schedule 1.13 prior to the Effective Time.
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5.6 Conduct of Business. Between the date of this Agreement and the
Closing, except as contemplated by Schedule 3.11, without the prior written
consent of AMG:
(a) the Company will conduct its business only in the ordinary
course of business, and consistent with past practices, and the LLC will only
conduct those operations necessary for the performance of its obligations
hereunder and activities necessary in connection therewith, except that the
Company may make dividend distributions and bonus payments prior to the Closing
subject to the Company's ability to comply with the conditions to Closing set
forth in Section 8.10;
(b) neither the Company nor the LLC will (i) make (or incur any
obligation to make) any purchase, sale or disposition of any asset or property
other than as specifically provided for in the LLC Contribution Agreement, or in
the ordinary course of business consistent with past practices, or (ii) subject
to any Claim any of its properties or assets (including, without limitation,
with respect to the Company, its interest in the LLC), nor permit any of the
foregoing to exist;
(c) neither the Company nor the LLC will change its banking
arrangements or incur any contingent or fixed obligations or liabilities
including, without limitation, any liability (contingent or fixed) as a
guarantor or otherwise with respect to the obligations of others except, with
respect to the Company, in the ordinary course of business consistent with past
practices, except that the Company may incur indebtedness on terms and
conditions (as to both form and substance) reasonably acceptable to AMG in an
amount not to exceed $5,300,000 to pay certain tax liabilities and expenses
arising in connection with the transactions contemplated hereby subject to the
Company's ability to comply with the conditions to Closing set forth in Section
8.12;
(d) the Company will not make or incur any obligation to make a
change in its Articles of Organization, By-laws or authorized or issued capital
stock (except as contemplated by Section 3.3 hereof), and the LLC will not make
or incur any obligation to make any change in the Existing LLC Agreement (other
than the restatement into the Restated LLC Agreement as contemplated by Section
2.2 hereof);
(e) neither the Company nor the LLC will declare, set aside or pay
any dividend or distribution, make (or incur an obligation to make) any other
distribution in respect of its capital stock or interests or make (or incur an
obligation to make) any direct or indirect redemption, purchase or other
acquisition of its stock or interests, except that the Company may make dividend
distributions and bonus payments prior to the Closing subject to the Company's
ability to comply with the conditions to Closing set forth in Section 8.12;
(f) neither the Company not the LLC will make any change in the
compensation payable or to become payable to any of the Company's officers,
employees, agents or independent contractors, or enter into any collective
bargaining agreement, bonus,
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equity, option, profit sharing, compensation, welfare, retirement, or other
similar arrangement, or any employment contract;
(g) the Company will not prepay any loans (if any) from its
stockholders, officers or directors;
(h) the Company will use commercially reasonable efforts to prevent
any change with respect to its management and supervisory personnel;
(i) the Company will have in effect and maintain at all times all
insurance of the kind (including, without limitation, covering liabilities of
directors and officers), in the amount and with the insurers set forth in
Schedule 3.19 or equivalent insurance with any substitute insurers approved in
writing by AMG, and prior to the Closing, the LLC will obtain and have in effect
and thereafter maintain at all times all insurance of the kind (including,
without limitation covering liabilities of directors and officers), in the
amount and with the insurers set forth in Schedule 3.19 or equivalent insurance
with any substitute insurers approved in writing by AMG; and
(j) neither the Company nor the LLC will settle any material
litigation.
5.7 Financial Statements. Until the Closing, the Company will furnish AMG
with unaudited monthly balance sheets and statements of income of the Company
within fifteen (15) business days after each month end for each month ending
more than fifteen (15) business days prior to the Closing, which financial
statements shall be prepared in accordance with GAAP applied consistently
(except that they need not include footnotes and related statements of cash
flows and stockholders' equity and except that the statements with respect to
the month of January, 1998, need not be prepared on an accrual basis), shall
present fairly in all material respects the financial condition of the Company
and the LLC at the dates of said statements and the results of their operations
for the periods covered thereby and, beginning with the first full month
following the date hereof shall be prepared using the accrual method of
accounting. Notwithstanding the foregoing, by February 15, 1998, the Company
will furnish AMG with an audited balance sheet of the Company at November 30,
1997 and audited statements of income, cash flows and stockholders' equity for
the year ended November 30, 1997 and an unaudited balance sheet of the Company
at December 31, 1997 and unaudited statements of income cash flows and
stockholders' equity for the month ended December 31, 1997, which financial
statements shall be prepared in accordance with GAAP applied consistently using
the accrual method of accounting (except that they need not include footnotes)
and shall present fairly in all material respects the financial condition of the
Company at the dates of said statements an the results of operations for the
periods covered thereby. The Company will furnish AMG with financial statements
of each Private Fund and Foreign Fund for the year ended December 31, 1997 as
soon as reasonably practicable after such financial statements are available.
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5.8 Preservation of Business and Assets. Until the Closing, each of the
Company, the LLC and each of the Majority Stockholders shall use commercially
reasonable efforts to: (a) preserve the current business of the Company, (b)
maintain the present clients of the Company, in each case, on terms that are at
least as favorable as the terms of the agreement between the Company and the
relevant client as in effect on the date hereof, (c) preserve the goodwill of
the Company, and (d) preserve any Licenses required for, or useful in connection
with, the business of the Company (including without limitation all investment
adviser, and investment adviser representative, registrations). In addition,
except as expressly contemplated by this Agreement, none of the Majority
Stockholders shall take or permit to be taken any material action not in the
ordinary course of business relating to the Company or which could reasonably be
expected to have a material effect on the transactions contemplated hereby,
without the prior consent of AMG.
5.9 Observer Rights and Access. Until the Closing: (a) within three (3)
business days after any meetings of the Company's stockholders or directors (or
a committee thereof) and in any event at or prior to the Closing, the Company
shall provide AMG with copies of detailed minutes of such meetings, including
all action taken thereof, (b) AMG shall be entitled to receive all notices and
information furnished by the Company to its stockholders and directors (or a
committee thereof), as well as copies of the minutes of any meetings of the
Company's stockholders and directors (or a committee thereof), and (c) the
Company's stockholders or directors (or a committee thereof) shall not take any
action by written consent in lieu of a meeting unless AMG shall have been given
prior written notice which includes a copy of such written consent by which such
action is proposed to be taken. The Company and the LLC shall afford to AMG and
its representatives and agents reasonable access, during normal business hours
and with reasonable notice, to the properties and records of the Company and the
LLC in order that AMG may have full opportunity to make such investigation as it
shall desire for purposes consistent with this Agreement.
5.10 Notice of Default. Promptly upon the occurrence of, or promptly upon
the Company or a Majority Stockholder becoming aware of the threatened
occurrence of, any event which would cause or constitute a breach or default, or
would have caused or constituted a breach or default had such event occurred or
been known to the Company or such Majority Stockholder prior to the date hereof,
of any of the representations, warranties or covenants of the Company or the
Majority Stockholders contained in or referred to in this Agreement or in any
Schedule or Exhibit referred to in this Agreement, the Company and such Majority
Stockholder shall give a written description consisting of notice thereof to
AMG, and the Company and the Stockholders shall use commercially reasonable
efforts to prevent or promptly remedy the same.
5.11 Consummation of Agreement. The Company and each of the Majority
Stockholders shall use commercially reasonable efforts to perform and fulfill
all conditions and obligations to be performed and fulfilled by each of them
under this Agreement, to the end that the transactions contemplated by this
Agreement shall be fully carried out.
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5.12 Cooperation of the Company and Stockholders.
(a) The Company and each of the Majority Stockholders shall
cooperate with all reasonable requests of AMG in connection with the
consummation of the transactions contemplated hereby and the making of any
filings required in connection therewith, including, without limitation, filings
under the HSR Act. In addition, the Majority Stockholders shall, and shall cause
the Company and the LLC to, cooperate fully, as and to the extent requested by
AMG, in connection with the filing of tax returns and any audit, litigation or
other proceedings, whether with respect to taxes or otherwise.
(b) The Company and each of the Majority Stockholders shall for all
purposes treat the value of the AMG Shares on a basis consistent with the
Valuation and shall pay when due fifty percent (50%) of any expenses incurred in
connection with the preparation of the Valuation Report.
(c) The Company and the Majority Stockholders shall send to each
Person who is a former holder of capital stock of the Company and is entitled to
receive Merger Consideration as reflected on Schedule 1.7 (a "Former
Shareholder"), and, in the case of Former Shareholder, an Investment
Representations Letter and a Release in the form attached to the Escrow
Agreement and shall use commercially reasonable efforts to obtain executed
copies of such documents.
(d) The Company and the Majority Stockholders shall send to each
Person who is a Stockholder a Release in the form attached to the Supplemental
Purchase Agreement and shall use commercially reasonable efforts to obtain
executed copies of such document.
5.13 No Solicitation of Other Offers. Until a date which is three (3)
months after a termination of this Agreement pursuant to Section 10.1 hereof for
any reason other than a material breach by AMG of its representations,
warranties or covenants set forth herein, neither the Company, the LLC, the
Majority Stockholders, nor any of their representatives will, directly or
indirectly, solicit, encourage, assist, initiate discussions or engage in
negotiations with, provide any information to, or enter into any agreement or
transaction with, any person, other than AMG, relating to the possible
acquisition of the Company Shares, the Company, the LLC or any of their
respective assets, except for the sale of assets by the Company in the ordinary
course of business consistent with past practices and the terms of this
Agreement or transfers of the Company Shares among the Stockholders, redemptions
of Company Shares and issuances of Company Shares to new employees, in each
case, consistent with past practices.
5.14 Confidentiality. The Company and the Majority Stockholders agree
that, unless and until the Closing has been consummated, each of the Company,
the LLC, the Majority Stockholders and their officers, directors, members,
agents and representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from AMG with respect
to its business or financial condition except for the purpose of
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evaluating, negotiating and completing the transaction contemplated hereby.
Information generally known in AMG's industry or which has been disclosed to the
Company, the LLC or the Majority Stockholders by third parties which have a
right to do so shall not be deemed confidential or proprietary information for
purposes of this Agreement. If the transactions contemplated by this Agreement
are not consummated, the Company, the LLC and the Majority Stockholders will
return, and cause their respective stockholders, officers, directors, members,
agents and representatives to return, to AMG (or certify that they have
destroyed) all copies of such data and information, including but not limited to
financial information, customer lists, business and corporate records,
worksheets, test reports, tax returns, lists, memoranda, and other documents
prepared by or made available by AMG to the Company, the LLC or the Majority
Stockholders (and their stockholders, officers, directors, members, agents and
representatives) in connection with the transaction.
5.15 Tax Returns. The Company and the Stockholders shall cooperate with
AMG to permit the Company, in accordance with applicable law, to promptly
prepare and file on or before the due date or any extension thereof all federal,
state and local tax returns required to be filed by the Company with respect to
taxable periods ending on or before the Closing.
5.16 Policies and Procedures. The Company, the LLC and the Majority
Stockholders shall, and shall cause the employees of the Company to, cooperate
with and assist in such compliance audits and regulatory reviews as may
reasonably be requested by and at the expense of AMG.
5.17 No Violation of LLC Agreement. Except as otherwise expressly
permitted or contemplated by this Agreement, between the date of this Agreement
and the Closing, none of the Majority Stockholders, the Company nor the LLC will
take any action that is in violation of any term or provision of the Existing
LLC Agreement or would be in violation of any term or provision of the Restated
LLC Agreement if such Restated LLC Agreement were then in effect.
5.18 Subsidiaries; Investments in Other Persons. Between the date of this
Agreement and the Closing, none of the Majority Stockholders, the Company nor
the LLC will take any action to acquire, form or otherwise establish any
subsidiary of the Company or the LLC or cause the Company or the LLC to make any
investment in any other Person, except that the Company may form and invest in
new Private Funds consistent with past practices and on substantially the same
terms and conditions as currently in effect for the Private Funds existing as of
the date of this Agreement.
5.19 LLC Interests. Between the date of this Agreement and the Closing,
(a) the Company and the Stockholders will not permit the LLC to take any action
to issue any rights or interests in addition to or different from the interests
in the LLC shown in the records set forth on Schedule 3.4(b)(i), (b) the Company
and the Stockholder will not permit the LLC to take any action that will cause
the interests in the LLC set forth on Schedule 3.4(b)(i) to be revoked,
repurchased, rescinded, terminated, liquidated, transferred, amended or modified
in
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any manner and (c) neither the Company nor any Stockholder will sell, assign,
pledge, subject to a Claim or otherwise transfer or restrict such Person's
interests in the LLC without the prior written consent of AMG. At the Closing,
the LLC shall issue the interests and rights therein set forth in the Restated
LLC Agreement to the Members (as defined in the Restated LLC Agreement).
5.20 Employee Programs. Between the date of this Agreement and the
Closing, the LLC will not maintain any Employee Program other than the Employee
Programs listed on Schedule 3.24.
5.21 Foreign Qualifications. The LLC shall qualify to do business as a
foreign limited liability company under the laws of each jurisdiction listed on
Schedule 3.2(a). Such states constitute all of the jurisdictions in which the
nature of the business it will conduct after giving effect to the LLC
Contribution, or the ownership or leasing of the properties it will receive in
the LLC Contribution, requires such qualification, except for those
jurisdictions where the failure to so qualify, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect on the LLC.
5.22 Liens. Between the date of this Agreement and the Closing, the LLC
shall not cause or permit any of the assets listed in Schedule 3.6(b) to be or
become subject to any Claim.
SECTION 5A. COVENANTS OF THE COMPANY, THE MAJORITY STOCKHOLDERS AND AMG
WITH RESPECT TO CERTAIN TAX MATTERS.
5A.1 Section 338(h)(10) Election.
(a) The Company and each of the Majority Stockholders will join with
AMG in making an election under Section 338(h)(10) of the Code (and any
corresponding election under state, local and foreign tax law) with respect to
the purchase and sale of the stock of the Company hereunder through the Merger
(the "Elections"). Each Majority Stockholder will include his or her
proportionate share of any income, gain, loss, deduction or other tax item
resulting from the Elections on his or her tax returns to the extent permitted
by applicable law. Each Majority Stockholder shall also pay his or her share of
any Tax imposed on the Company or the LLC or other successors in interest of the
Company attributable to the making of the Elections, including, but not limited
to, (i) any Tax imposed under section 1374 of the Code, (ii) any Tax imposed
under Treasury Regulations Section ss.1.338(h)(10)-1(e)5, or (iii) any state,
local or foreign Tax imposed on the Company's gain.
(b) The Majority Stockholders, jointly and severally, shall
indemnify and hold harmless the AMG Indemnified Parties from and against (i)
liabilities and obligations for any Taxes (other than income taxes) in excess of
twenty five thousand dollars ($25,000) incurred by the Company with respect to
any period ending on or before the date of the
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Closing (ii) the failure of any Stockholder to pay his or her share of any Tax
attributable to the making of the Elections (iii) the breach by any Stockholder
of any provision of the Supplemental Purchase Agreement relating to or involving
Tax matters and (iv) the Company against any adverse consequences or losses
arising out of or relating to any failure to pay any such Taxes or resulting
from any such breach. Such indemnification shall be governed by the procedures
set forth in Section 12.5.
(c) The Majority Stockholders and AMG agree that MADSP (as such term
is used in Treasury Regulations Section 1.338(h)(10)-1(f)) for AMG's purchase of
the Company shall be allocated among the assets of the Company in accordance
with the provisions of that Section. A preliminary estimate of such allocation
shall be agreed by AMG and the Majority Stockholders as soon as practicable
after the date hereof. The final allocation as of the Closing Date (the "Asset
Allocation") shall be agreed to by the Majority Stockholders and AMG as soon as
practicable after the Closing Date. If the Majority Stockholders and AMG are
unable to agree on the Asset Allocation, such allocation shall be determined on
the basis of an appraisal prepared by the Accounting Firm (as defined below).
AMG shall prepare IRS Form 8023 (and any required attachments) and any similar
state, local or foreign tax forms (and any required attachments) required to
make the Elections (collectively, the "Election Forms" and each singularly, the
"Election Form") and shall submit the Election Forms to the Majority
Stockholders no later than seventy-five (75) days following the Closing Date. In
the event of any dispute with regard to the content of any Election Form
(including any dispute concerning the Asset Allocation), the parties shall
diligently attempt to resolve such dispute. If they have not done so by the
thirtieth (30th) day prior to the date the Election Form in question is required
to be filed, the dispute shall be resolved by Coopers & Lybrand LLP or, a
nationally recognized form of independent auditors acceptable to both the
Majority Stockholders and AMG (the "Accounting Firm"), at least ten (10) days
prior to the time the Election Form is required to be filed. Each Majority
Stockholder shall promptly execute the applicable Election Forms and shall
return such Election Forms to AMG promptly and in any event not less than five
(5) days after the date on which the Election Form is submitted to such Majority
Stockholder (following the final resolution of any issues pursuant to the
foregoing sentence). AMG shall file the Election Forms in accordance with
applicable tax laws.
5A.2. Tax Periods Ending on or Before the Closing Date. The Majority
Stockholders shall prepare or cause to be prepared and file or cause to be filed
all income Tax returns for the Company and the LLC for all periods ending on or
prior to the Closing Date which are filed after the Closing Date. The Majority
Stockholders shall permit AMG to review and comment on each such Tax Return
described in the preceding sentence prior to filing. To the extent permitted by
applicable law, the Majority Stockholders shall include any income, gain, loss,
deduction or other tax items for such periods on their Tax returns in a manner
consistent with the Schedule K-1s furnished by the Company to the Majority
Stockholders for such periods.
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5A.3. Cooperation on Tax Matters.
(d) The Stockholders and AMG shall report all transactions pursuant
to this Agreement in a manner that is consistent with the Elections and shall
take no position contrary thereto unless required to do so pursuant to a
"determination" within the meaning of Section 1313 of the Code or an analogous
provision under state, local or foreign tax law.
(e) AMG, the Company and the Majority Stockholders shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with the filing of Tax Returns pursuant to this section and any
audit, litigation or other proceeding with respect to Taxes. Such cooperation
shall include the retention and (upon the other party's request) the provision
of records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. The Company and its Majority Stockholders agree (A)
to retain all books and records with respect to Tax matters pertinent to the
Company and the LLC relating to any taxable period beginning before the Closing
Date until the expiration of the statute of limitations (and, to the extent
notified by AMG or the Majority Stockholders, any extensions thereof) of the
respective taxable periods, and to abide by all record retention agreements
entered into with any Taxing Authority, and (B) to give the other party
reasonable written notice prior to transferring, destroying or discarding any
such books and records and, if the other party so requests, the Company or the
Majority Stockholders, as the case may be, shall allow the other party to take
possession of such books and records. AMG and the Majority Stockholders further
agree, upon request, to use their best efforts to obtain any certificate or
other document from any governmental authority or any other person as may be
necessary to mitigate, reduce or eliminate any Tax that could be imposed
(including, but not limited to, with respect to the transactions contemplated
hereby).
5A.4 Tax Status. Between the date of this Agreement and the Closing, the
Company and the Majority Stockholders shall keep in effect and not revoke the
Company's election to be taxed as an S corporation within the meaning of
Sections 1361 and 1362 of the Code. Neither the Company nor any of the Majority
Stockholders shall take or permit any action (other than the Merger) that would
result in the termination of the Company's status as a validly existing S
corporation within the meaning of Sections 1361 and 1362 of the Code.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF AMG.
6.1 Making of Representations and Warranties. As a material inducement to
the Company and the Majority Stockholders to enter into this Agreement and
consummate the transactions contemplated hereby, AMG hereby makes the
representations and warranties contained in this Section 6, to the Company and
the Majority Stockholders.
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6.2 Organization of AMG. AMG is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware with full
corporate power and authority to own or lease its assets and other properties
and to conduct its business in the manner and in the places where such assets
and other properties are owned or leased or such business is conducted by it.
AMG is not in violation of any term of its Certificate of Incorporation or
By-laws, each as amended and restated to the date of this Agreement.
6.3 Authority of AMG. AMG has full right, authority and power to enter
into this Agreement and each agreement, document and instrument to be executed
and delivered by AMG pursuant to or as contemplated by, this Agreement, the
Restated LLC Agreement and to carry out the transactions contemplated hereby and
thereby. The execution, delivery and performance by AMG of this Agreement, the
Restated LLC Agreement and each such other agreement, document and instrument
have been duly authorized by all necessary corporate action of AMG and no other
action on the part of AMG is required in connection therewith, except that as of
the date of this Agreement AMG has not yet filed with the Secretary of State of
the State of Delaware the Certificate of Designations. This Agreement, the
Restated LLC Agreement and each other agreement, document and instrument
executed and delivered by AMG pursuant to this Agreement constitute, or when
executed and delivered will constitute, valid and binding obligations of AMG
enforceable in accordance with their terms, except as enforceability may be
restricted, limited or delayed by applicable bankruptcy or other laws affecting
creditors' rights generally. The execution, delivery and performance by AMG of
this Agreement, the Restated LLC Agreement and each such agreement, document and
instrument:
(i) does not and will not violate any provision of the
Certificate of Incorporation or By-laws of AMG, each as amended and
restated to the date hereof;
(ii) does not and will not violate any laws of the United
States or of any state or any other jurisdiction applicable to AMG or
require AMG to obtain any approval, consent or waiver of, or make any
filing with, any Person that has not been obtained or made, except as
specifically identified in Schedule 6.3; and
(iii) assuming that the consents or approvals set forth on
Schedule 6.3 have been obtained, does not and will not result in a breach
of, constitute a default under, accelerate any obligation under, or give
rise to a right of termination of any agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order, writ, judgment,
injunction, decree, determination or arbitration award to which AMG is a
party or by which any of its property is bound or affected, or result in
the creation or imposition of any Claim on any of AMG's assets which would
reasonably be expected to have a Material Adverse Effect on AMG and its
Affiliates on a consolidated basis.
6.4 Capitalization. As of the date of this Agreement, the duly authorized
capital stock of AMG consists of those classes, series and numbers of shares as
are set forth in Schedule 6.4. In addition, set forth in Schedule 6.4 are the
numbers of shares of each such
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class and series which are issued and outstanding or with respect to which
options have been granted as of the date of this Agreement or which have been
reserved for issuance in connection with the conversion of the Series C
Non-Voting Convertible Stock of AMG. All the outstanding shares of capital stock
of AMG have been duly authorized and validly issued and are fully paid and
nonassessable. All of the AMG Shares issuable pursuant to this Agreement in
exchange for Company Shares at the Effective Time and all shares of Common
Stock, par value $.01 per share, of AMG issuable upon conversion of the Series C
Non-Voting Convertible Stock of AMG in accordance with the Certificate of
Designations and the Amended and Restated Certificate of Incorporation of AMG,
will be, when so issued and paid for, duly authorized, validly issued, fully
paid and nonassessable. Based upon and subject to the accuracy of the
representations in the Subscription Agreement, and assuming each Person who
receives such AMG Shares pursuant to this Agreement has duly executed and
delivered and is bound by a Subscription Agreement, and subject to receipt of
consideration therefor, upon issuance pursuant to this Agreement of the AMG
Shares, such AMG Shares shall be issued in compliance with the federal
securities laws and the state securities laws of the Commonwealth of
Massachusetts.
6.5 Litigation. There is no litigation or legal or other action, suit or
proceeding pending or, to its knowledge, threatened against AMG or, to AMG's
knowledge, investigations, at law or in equity, or before any federal, state,
municipal or other governmental department, commission, bureau, board, agency or
instrumentality, domestic or foreign (including, without limitation, any
voluntary or involuntary proceedings under the Bankruptcy Code or any action,
suit, proceeding or investigation under any Federal or state securities law,
rule or regulation), in which AMG or any officer, director, stockholder or
employee thereof is engaged or with which any of them is threatened, which would
prevent or hinder the consummation of the transactions contemplated by this
Agreement or would reasonably be expected to have a Material Adverse Effect on
AMG and its Affiliates on a consolidated basis.
6.6 Acquisition of Shares for Investment. AMG has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of its purchase of the shares of Company Shares. AMG
confirms that the Stockholders and the Company have made available to AMG the
opportunity to ask questions of the officers and management employees of the
Company and to acquire additional information about the business and financial
condition of the Company and the LLC. AMG is acquiring the Company Shares for
investment and not with a view toward or for sale in connection with any
distribution thereof in violation of any federal or state securities or "blue
sky" law, or with any present intention of distributing or selling such shares
in violation or any federal or state securities or "blue sky" law. AMG
understands and agrees that the Company Shares may not be sold, transferred,
offered for sale, pledged, hypothecated or otherwise disposed of without
registration under the Securities Act, except pursuant to an exemption from such
registration available under such Act, and without compliance with state, local
and foreign securities laws, in each case, to the extent applicable.
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6.7 Finder's Fee. AMG has not incurred or become liable for any broker's
commission or finder's fee relating to or in connection with the transactions
contemplated by this Agreement.
6.8 Merger Sub. Merger Sub is a newly formed wholly-owned subsidiary of
AMG that contains no assets or liabilities other than those incident to its
formation and the consummation of the transactions contemplated hereby.
6.9 Financial Statements.
(a) Attached hereto as Exhibit 6.9 are audited balance sheets of AMG
at December 31, 1995 and December 31, 1996, and audited statements of income,
cash flows and stockholders' equity for the years then ended, as well as an
unaudited balance sheet of AMG at September 30, 1997 and unaudited statements of
income, cash flow and stockholders equity for the nine months then ended.
(b) Said financial statements have been prepared in accordance with
generally accepted accounting principles using the accrual method of accounting,
present fairly the financial condition of AMG at the date of said statements and
the results of its operations for the period covered thereby (except that AMG's
unaudited financial statements do not include footnote disclosure or year-end
adjustments).
6.10 Absence of Changes. Except as disclosed in Schedule 6.10, since
September 30, 1997 there has not been any (a) event which either individually or
in the aggregate, could reasonably be expected to have a Material Adverse Effect
on AMG and its Affiliates on a consolidated basis, or (b) declaration, setting
aside or payment of any dividend or other distribution in respect of the capital
stock of AMG. Notwithstanding the foregoing clause (a), no representation is
given herein with respect to (i) the terms or conditions on which AMG is
negotiating, or may have negotiated, debt and/or equity financings, or (ii) the
terms or conditions on which AMG is negotiating or may have negotiated
investments in investment management companies, which investments have not
closed, or (iii) any impact on the condition (financial or otherwise)
properties, assets, liabilities, operations, business or prospects relating to
any investment of AMG, which investment may not have closed.
6.11 Compliance with Laws. AMG (with respect to AMG only, and not its
Affiliates) is, and at all times has been, in material compliance with all
Investment Laws and Regulations applicable to it, except to the extent that
noncompliance would not reasonably be expected to have a Material Adverse Effect
on AMG and its Affiliates on a consolidated basis. Neither AMG nor any officer,
director or employee thereof is in default with respect to any judgment, order,
writ, injunction, decree, demand or assessment relating to any aspect of the
business or affairs or properties or assets of AMG and issued by any court or
any federal, state, municipal or other governmental agency, board, commission,
bureau, instrumentality or department, domestic or foreign, or by any
self-regulatory authority. Neither AMG nor any officer, director or employee of
AMG, is charged or, to the knowledge of AMG, under
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investigation with respect to, any violation of any provision of foreign,
federal, state, municipal or other law or any administrative rule or regulation,
domestic or foreign, including, without limitation, any Investment Laws and
Regulations, relating to any aspect of the business or affairs or properties or
assets of AMG or the transactions contemplated hereby.
SECTION 7. COVENANTS OF AMG.
7.1 Making of Covenants and Agreement. AMG hereby makes the covenants and
agreements set forth in this Section 7.
7.2 Confidentiality. AMG agrees that, unless and until the Closing has
been consummated, each of AMG, Merger Sub and their respective officers,
directors, agents and representatives will hold in strict confidence, and will
not use, any confidential or proprietary data or information obtained from the
Company or the Stockholders with respect to its business or financial condition
except for the purpose of evaluating, negotiating and completing the transaction
contemplated hereby. Information generally known in the Company's industry or
which has been disclosed to AMG by third parties which have a right to do so
shall not be deemed confidential or proprietary information for purposes of this
Agreement. If the transactions contemplated by this Agreement are not
consummated, AMG will return, and will cause its officers, directors, agents and
representatives to return, to the Company (or certify that they have destroyed)
all copies of such data and information, including but not limited to financial
information, customer lists, business and corporate records, worksheets, test
reports, tax returns, lists, memoranda, and other documents prepared by or made
available to AMG (and its officers, directors, agents and representatives) in
connection with the transaction.
7.3 Cooperation of AMG.
(a) AMG shall cooperate (and shall cause Merger Sub to cooperate)
with all reasonable requests of the Company in connection with the Company's
compliance with its covenants in Sections 5.2, 5.3 and 5.4 hereof.
(b) AMG shall for all purposes report (and shall cause Merger Sub to
report) the value of the AMG Shares on a basis consistent with the Valuation and
shall pay when due fifty percent (50%) of any expenses incurred in connection
with the preparation of the Valuation Report.
7.4 HSR Act. AMG will use commercially reasonable efforts to obtain the
termination of the applicable waiting period under the HSR Act (including any
extensions thereof).
7.5 Notice of Default. Promptly upon the occurrence of, or promptly upon
AMG becoming aware of the impending or threatened occurrence of, any event which
would cause or constitute a breach or default, or would have caused or
constituted a breach or default had such
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event occurred or been known to AMG prior to the date hereof, of any of the
representations, warranties or covenants of AMG contained in or referred to in
this Agreement or in any Schedule or Exhibit referred to in this Agreement, AMG
shall give written notice thereof to the Company.
7.6 Consummation of Agreement. AMG shall use commercially reasonable
efforts to perform and fulfill all conditions and obligations to be fulfilled by
it under this Agreement, to the end that the transactions contemplated by this
Agreement shall be fully carried out.
7.7 Contribution to LLC. On or promptly following the Closing, AMG shall
cause Merger Sub to make an additional contribution to the capital of the LLC as
contemplated in Section 4.1 of the Restated LLC Agreement to fund contributions
by the LLC to the Private Funds as contemplated thereby, provided that such
amount shall not exceed $150,000.
7.8 Transactions in AMG Shares. In the event that AMG issues any
additional shares of its Series C Non-Voting Convertible Stock to any
Stockholder as a result of a dividend, distribution, subdivision, combination or
reclassification of shares of capital stock, it will not, from the effective
time of such issuance through the date on which such shares of Series C
Non-Voting Convertible Stock automatically convert into shares of Common Stock,
par value $.01 per share of AMG in accordance with the Certificate of
Designations, issue any additional shares of Series C Non-Voting Convertible
Stock as a result of an additional dividend, distribution, subdivision,
combination or reclassification of its shares of capital stock.
SECTION 8. CONDITIONS TO THE OBLIGATIONS OF AMG.
The obligation of AMG and Merger Sub to consummate this Agreement and the
transactions contemplated hereby are subject to the fulfillment (or waiver by
AMG), prior to or at the Closing, of the following conditions precedent:
8.1 Litigation; No Opposition. No judgment, injunction, order or decree
enjoining or prohibiting any of AMG, the Company, Merger Sub, the LLC or any of
the Stockholders or other parties to this Agreement or any of the agreements,
documents and instruments contemplated hereby, from consummating the
transactions contemplated hereby or thereby, shall have been entered and no
suit, action or proceeding shall be pending or threatened at any time prior to
or on the date of the Closing before or by any court or governmental body
seeking to restrain or prohibit, or seeking damages or other relief in
connection with, the execution and delivery of this Agreement or any of the
agreements, documents and instruments contemplated hereby or, the consummation
of the transactions contemplated hereby or thereby or which could reasonably be
expected to have a Material Adverse Effect on the Company, the LLC (with such
materiality determined as if the LLC Contribution had previously occurred) or
AMG; provided however that any threatened suit, action or proceeding for damages
or injunctive relief or any suit, action or proceeding only for damages by
Former Shareholders
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that may arise under or relate to the Amended and Restated Shareholders
Agreement dated as of August 10, 1994, a true and complete copy of which has
been provided to AMG (the "Shareholders Agreement") but not any pending suit,
action or proceeding which includes, in addition to any other relief sought, a
prayer for preliminary injunctive relief or a temporary restraining order
(collectively a "Preliminary Injunction Motion") against the Company, the
Majority Stockholders, Merger Sub, the LLC or AMG) shall be disregarded solely
for purposes of determining satisfaction of the conditions contained in this
Section 8.1 and not for determining liability under Section 12 hereof. In the
event that a Preliminary Injunction Motion is pending at any time prior to the
Closing, the parties shall cooperate and use their commercially reasonable
efforts to cause such Preliminary Injunction Motion to be denied or dismissed.
In the event that such Preliminary Injunction Motion remains pending at the time
when the Closing would otherwise occur, the Closing shall be delayed fifteen
(15) days and in the event that such Preliminary Injunction Motion remains
pending at such date that is fifteen (15) days after the originally scheduled
Closing date, the Closing shall be delayed an additional fifteen (15) days,
provided, that the Closing shall occur on the second business day following
denial or dismissal of any Preliminary Injunction Motion (or such other date as
may be agreed by the parties) and, in any event, the date set forth in Section
10.1 shall be extended through the end of any extension period contemplated
hereby.
8.2 Representations, Warranties and Covenants.
(a) Each of the representations and warranties of the Company and
each of the Stockholders contained in this Agreement and in any Schedule or
Exhibit attached hereto and in each other agreement, document, instrument or
certificate contemplated hereby or otherwise made in writing by any of them or
made by any person authorized by them to make representations on their behalf,
shall be true and correct in all material respects (except that solely for the
purposes of determining satisfaction of the condition contained in this Section
8.2(a) and not for determining liability under Section 12 hereof,
representations and warranties that are qualified by their terms as to
materiality, shall be true in all respects as so qualified and except to the
extent contemplated in Section 8.11 with respect to damages or claims arising
out of the Shareholders Agreement) as of the date of this Agreement and at and
as of the Closing as though newly made at such time; except that the
representations in Section 3.7 shall also be made with respect to assets under
management and advisory contracts as of a date which is no more than ten (10)
days prior to the Closing.
(b) Each and all of the agreements to be performed by the Company
and each of the Stockholders hereunder and under the other agreements, documents
and instruments contemplated hereby at or prior to the Closing shall have been
duly performed in all material respects. Each and all of the conditions to be
performed or satisfied by the Company and each of the Stockholders pursuant to
this Agreement and the other agreements, documents and instruments contemplated
hereby shall have been duly performed or satisfied.
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(c) The Company, the LLC and each of the Majority Stockholders shall
have furnished AMG with a certificate or certificates dated as of the date of
the Closing with respect
to each of the foregoing.
8.3 Client Consents. Clients of the Company whose advisory agreements
provide for the payment (based on the Contract Value of each such advisory
agreement) of annual fees constituting at least eighty-five percent (85%) of the
Base Fees shall have Consented to the transactions contemplated hereby, and
advisory agreements which (based on their Contract Values) represent eighty-five
percent (85%) of the Base Fees shall survive the Closing and the LLC
Contribution and then be in full force and effect. For purposes of this Section
8.3:
(i) "Base Fees" shall mean the annual advisory fees (other
than incentive or performance fees) payable to the Company under all its
contracts calculated based on assets under management and the fee
schedules set forth in the relevant agreements as of December 31, 1997;
(ii) "Consent" shall mean (A) with respect to a client whose
contract by its terms or under applicable law terminates upon the
consummation of the transactions contemplated hereby, that the LLC shall
have entered into a new contract on substantially equivalent terms which
contract is effective after giving effect to the Closing and the LLC
Contribution, (B) with respect to a client whose contract (by its terms or
under applicable law) requires written consent from a party or parties
thereto for it to survive the transactions contemplated hereby and by the
LLC Contribution Agreement, that the Company shall have obtained all such
written consents as may be required under such contract or under
applicable law, and (C) with respect to a client whose contract does not
require written consent (by its terms or under applicable law) from any
party thereto for it to survive the transactions contemplated hereby, that
the Company shall have obtained such consents as may be required under
such contract (including, with respect to the requirement for contracts to
include provisions requiring consent to transfer set forth under the
Advisers Act, that the Company has complied with Section 5.2 hereof with
respect to such contract). Notwithstanding the foregoing, no client of the
Company shall be deemed to have given its Consent if such client has
expressed an intent to terminate or significantly reduce its investment
relationship with the Company (or, after giving effect to the Closing and
the LLC Contribution, the LLC) or to adjust the fee schedule with respect
to one or more of its contracts in a manner that could materially reduce
the fee to the LLC from that client or contract, from that payable to the
Company on December 31, 1997 or the date hereof.
(iii) "Contract Value" shall mean, (A) with respect to an
advisory contract which was in effect on December 31, 1997, the annual
advisory fees (other than incentive or performance fees) payable to the
Company based on the fee schedule and assets under management set forth in
the relevant agreement as of December 31, 1997 (adjusted for any additions
and/or withdrawals since December 31, 1997 (other than withdrawals from
the Private Funds by the Company to redeem its general partner
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interests) and for any amendments to the fee schedule since such date),
and (B) with respect to an advisory contract which is entered into by the
Company after December 31, 1997, the annual advisory fees (excluding for
these purposes incentive or performance fees) payable to the Company based
on the fee schedule and assets under management set forth in the relevant
agreement on the date of such agreement (adjusted for any additions or
withdrawals since that date and for any amendments to the fee schedule
since such date).
At the Closing, the Company shall deliver a certificate certifying as to
compliance with the foregoing, which certificate includes the calculation of
compliance, including a list in the form of subsection (a) of Schedule 3.7 of
all investment management or advisory contracts as of the date of calculation,
including all the categories of information set forth in subsection (a) of
Schedule 3.7.
8.4 Transfer. The Company shall have established the escrow fund to fund
certain claims, liabilities and obligations under the Escrow Agreement in
accordance with Section 1.7 and Section 2.1 hereof.
8.5 Registration as an Investment Adviser. The LLC shall be registered as
an investment adviser under the Advisers Act and the rules and regulations
promulgated thereunder and shall be entitled to rely upon the succesor
provisions of Section 203(g) under the Adviser's Act, and made appropriate
filings under the laws of each state listed on Schedule 3.18(b).
8.6 Other Approvals. Except as otherwise specifically contemplated hereby,
all actions by or in respect of, or filings with, any governmental body, agency,
or official or authority required to permit the consummation of the transactions
contemplated hereby so that after the Closing and the LLC Contribution, the LLC
shall be able to carry on the business presently being conducted by the Company,
in the manner now conducted by the Company, shall have been taken, made or
obtained, and any and all other material permits, approvals, consents, Licenses
or other actions necessary to consummate the transactions hereunder shall have
been received or taken, and none of such permits, approvals, consents or
Licenses shall contain any provisions not currently in effect which are unduly
burdensome.
8.7 HSR Act. Any applicable waiting period under the HSR Act (including
any extensions thereof) shall have expired or been terminated.
8.8 Restated LLC Agreement. Each Majority Stockholder and other Persons as
described in Schedule 3.4(b)(ii) shall have executed and delivered the Restated
LLC Agreement and such Restated LLC Agreement shall be in full force and effect.
8.9 Employment Agreements. Each Majority Stockholder shall have entered
into an Employment Agreement with the LLC and Merger Sub in the form attached
hereto as Exhibit
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8.9 (the "Employment Agreements"), and each such Employment Agreement shall be
in full force and effect.
8.10 Non Solicitation/Non Disclosure Agreements. Each Person included as a
Non-Manager Member in the Restated LLC Agreement attached hereto as Exhibit 2.2
(other than those who entered into Employment Agreements) shall have entered
into a Non Solicitation/Non Disclosure Agreement with the LLC and the Company
(each a "Non Solicitation Agreement") in the form attached hereto as Exhibit
8.10, and each such Non Solicitation Agreement shall be in full force and
effect.
8.11 Capitalization, Net Worth and Working Capital of the Company and the
LLC. The Company's capitalization including ownership of capital stock and
options to purchase shares of capital stock shall be as set forth on Schedule
1.7 and Schedule 3.3. The LLC's capitalization, including capital and profits
interests and other rights to purchase interests in the LLC shall be as set
forth in Schedule 3.4(b)(ii). At the Closing, and after giving effect to the LLC
Contribution and taking into account all transaction costs of the Company and
the LLC, the LLC shall have a tangible net worth (determined in accordance with
GAAP of at least four million dollars ($4,000,000), working capital (defined as
current assets less current liabilities) of at least four million dollars
($4,000,000), which shall be not less than the amount necessary for the
operation of the business of the LLC, consistent with past practices of the
Company, and cash on hand of at least four million dollars ($4,000,000). AMG
shall be provided with a certificate from the President of the Company at the
Closing representing that the foregoing is true and correct.
8.12 Delivery. Each of the Company and the Stockholders shall have
executed (where applicable) and delivered to AMG (or shall have caused to be
executed and delivered to AMG by the appropriate person including, without
limitation, the LLC) the following:
(a) the LLC Contribution Agreement (including all agreements and
documents which are schedules thereto) and all such other documents of transfer
and assignment as AMG may reasonably require in connection therewith;
(b) certified copies of resolutions of the board of directors and
stockholders of the Company authorizing the execution of this Agreement and each
of the agreements, documents and instruments contemplated hereby to which the
Company is a party (and which the Company executes on behalf of the LLC);
(c) a copy of the Articles of Organization and By-laws of the
Company which, in the case of the Articles of Organization, is certified as of a
recent date by the Secretary of State of the Commonwealth of Massachusetts;
(d) a copy of the Certificate of Formation of the LLC certified as
of a recent date by the Secretary of State of the State of Delaware;
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(e) a copy of the Limited Liability Company Agreement of the LLC as
in effect immediately prior to the restatement into the Restated LLC Agreement;
(f) a certificate issued by the appropriate Secretary of State of
each state set forth in Schedule 8.12(f) and Schedule 3.2(b) certifying that
each of the Company and the LLC, as applicable, are in good standing in such
state as of the most recent practicable date;
(g) true and correct copies of each of the agreements, documents and
instruments contemplated hereby (including, without limitation, the Restated LLC
Agreement), and all agreements, documents, instruments and certificates
delivered or to be delivered in connection therewith;
(h) a certificate of the Clerk of the Company both on behalf of the
Company and for the Company as the Manager of the LLC, certifying that the
resolutions, Articles of Organization, limited liability company agreement and
By-laws in paragraphs (b), (c) and (e) above are in full force and effect and
have not been amended or modified, and that the officers of such corporation or
limited liability company are those persons named in the certificate;
(i) opinions from counsel to the Company and the Stockholders, in
substantially the forms of Exhibit 8.12(i), together with a favorable opinion
(which may be a "reasoned" opinion) reasonably acceptable in form and substance
to AMG from special counsel to the Company and the Stockholders (which counsel
shall be reasonably acceptable to AMG) with respect to the enforceability of the
non-competition and non-solicitation provisions of the Employment Agreement and
the Non-Solicitation Agreement;
(j) a release of the Company and the LLC from all liabilities other
than those arising out of the transactions or agreements contemplated hereby,
from each of the Stockholders indicated on Schedule 1.7 in the form attached
hereto as Exhibit 8.12(j).
(k) a Representation Certificate executed by the Company and each of
the Majority Stockholders in substantially the form attached hereto as Exhibit
8.12(k);
(l) a Consent Certificate executed by the Company and each of the
Majority Stockholders in substantially the form attached hereto as Exhibit
8.12(l);
(m) a Capitalization, Net Worth and Working Capital Certificate
executed by the Company and each of the Majority Stockholders in substantially
the form attached hereto as Exhibit 8.12(m);
(n) an Escrow Agreement in substantially the form attached
hereto as Exhibit 1.7;
(o) a Supplemental Indemnification Agreement in substantially the
form attached hereto as Exhibit 8.12(o) (the "Supplemental Indemnification
Agreement");
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(p) an opinion of Bermuda counsel to the Company and each of the
Majority Stockholders in substantially the form of Exhibit 8.12(p); and
(q) all corporate record books of the Company, including minutes of
all meetings of stockholders, directors and committees of the Board of
Directors, if any, and the stock records of the Company (including all original
stock certificates surrendered by the Stockholders); provided, however, that the
Company, the LLC and the Majority Stockholder and their respective
representatives and agents shall be permitted reasonable access to such books
and records during regular business hours upon their prior written request.
8.13 Material Adverse Effect. Since the date of this Agreement, there
shall have been no event which, either individually or in the aggregate, has had
or could reasonably be expected to have a Material Adverse Effect on the Company
or the LLC, and AMG shall be provided with a certificate from the President of
the Company to that effect at the Closing.
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE
MAJORITY STOCKHOLDERS.
The obligation of the Company and the Majority Stockholders to consummate
this Agreement and the transactions contemplated hereby is subject to the
fulfillment (or waiver by the Company), prior to or at the Closing, of the
following conditions precedent:
9.1 No Litigation; No Opposition. No judgment, injunction, order or decree
enjoining or prohibiting any of AMG, the Company, the LLC, the Merger Sub or any
of the Stockholders or other parties to this Agreement or any of the agreements,
documents and instruments contemplated hereby, from consummating the
transactions contemplated hereby, or thereby shall have been entered and no
suit, action or proceeding shall be pending or threatened on the date of Closing
before or by any court or governmental body seeking to restrain or prohibit the
execution and delivery of this Agreement or any of the agreements, documents or
instruments contemplated hereby or, the consummation of the transactions
contemplated hereby or thereby or which could reasonably be expected to have a
Material Adverse Effect on the Company, the LLC (which such materiality
determined as if the LLC Contribution shall have previously occurred) or AMG;
provided, however, that any threatened suit, action, or proceeding for damages
or injunctive relief or suit, action or proceeding only for damages by Former
Shareholders that may arise under or relate to the Shareholders Agreement buy
not any pending suit, action or proceeding which includes, in addition to any
other relief sought, any Preliminary Injunction Motion against the Company, the
Majority Stockholders, Merger Sub, the LLC or AMG) shall be disregarded solely
for purposes of determining satisfaction of the conditions contained in this
Section 8.1 and not for determining liability under Section 12 hereof. In the
event that a Preliminary Injunction Motion is pending at any time prior to the
Closing, the parties shall cooperate and use their commercially reasonable
efforts to cause such Preliminary Injunction Motion to be denied or dismissed.
In the event that such Preliminary Injunction Motion remains pending at the time
when the
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Closing would otherwise occur, the Closing shall be delayed fifteen (15) days
and in the event that such Preliminary Injunction Motion remains pending at such
date that is fifteen (15) days after the originally scheduled Closing date, the
Closing shall be delayed an additional fifteen (15) days, provided, that the
Closing shall occur on the second business day following denial or dismissal of
any Preliminary Injunction Motion (or such other date as may be agreed by the
parties) and, in any event, the date set forth in Section 10.1 shall be extended
through the end of any extension period contemplated hereby.
9.2 Representations, Warranties and Covenants.
(a) Each of the representations and warranties of AMG contained in
this Agreement and in any Schedule or Exhibit attached hereto and in each other
agreement, document, instrument or certificate contemplated hereby or otherwise
made in writing by AMG or by any person authorized by AMG to make
representations on its behalf shall be true and correct in all material respects
(except for such representations and warranties that are qualified by their
terms as to materiality, which representations or warranties as so qualified
shall be true in all respects and except to the extent contemplated in Section
8.1 with respect to damages or claims arising out of the Shareholders Agreement)
at and as of the Closing as though newly made at such time.
(b) Each and all of the agreements to be performed by AMG hereunder
and under the other agreements, documents and instruments contemplated hereby at
or prior to the Closing shall have been duly performed in all material respects.
Each and all of the conditions to be performed or satisfied by AMG at or prior
to the Closing pursuant to this Agreement and the other agreements, documents
and instruments contemplated hereby shall have been duly performed or satisfied.
(c) AMG shall have furnished the Majority Stockholders with a
certificate dated as of the date of the Closing to the foregoing effect.
9.3 Client Consent. The conditions set forth in Section 8.3 shall
have been met.
9.4 Delivery. AMG shall have executed and delivered to the Company, the
following:
(a) certified copies of resolutions of the board of directors of AMG
and of Merger Sub authorizing the execution of this Agreement and each of the
other agreements, documents or instruments contemplated hereby to which AMG or
Merger Sub, as applicable, is a party;
(b) a copy of the Amended and Restated Certificate of Incorporation
and by-laws of AMG and of the Articles of Organization and By-laws of Merger Sub
which, in the case of each of the Amended and Restated Certificate of
Incorporation and the Articles of
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Organization, is certified as of a recent date by the Secretary of State of the
State of Delaware or the Secretary of State of the Commonwealth of Massachusetts
as applicable;
(c) certificates issued by the Secretary of State of the State of
Delaware and the Commonwealth of Massachusetts, respectively, certifying that
each of AMG and Merger Sub is validly existing and in good standing in the State
of Delaware and the Commonwealth of Massachusetts, respectively, as of the most
recent practicable date;
(d) true and correct copies of each of the agreements, documents and
instruments contemplated hereby (including, without limitation, the Restated LLC
Agreement) to which AMG is a party, and all agreements, documents, instruments
and certificates delivered or to be delivered in connection therewith by AMG;
(e) a certificate of the Secretary of AMG and of Merger Sub
certifying that the resolutions, Amended and Restated Certificate of
Incorporation, Certificate of Incorporation, and by-laws in paragraphs (a) and
(b) above are in full force and effect and have not been amended or modified,
and that the officers of AMG and Merger Sub, as applicable are those persons
named in the certificate; and
(f) an opinion from Goodwin, Procter & Hoar LLP in substantially the
form of Exhibit 9.4(f).
9.5 Registration as an Investment Adviser. The LLC shall have become
registered as an investment adviser under the Advisers Act and the rules and
regulations promulgated thereunder, and made appropriate filings under the laws
of each state where such filings may be necessary (in the reasonable opinion of
the Company, which shall not include any states in which the Company is not
registered on the date of this Agreement) to enable the LLC, after giving effect
to the LLC Contribution Agreement and the Closing, to conduct the business
presently conducted by the Company.
9.6 HSR Act. Any applicable waiting period under the HSR Act (including
any extensions thereof) shall have expired or been terminated.
9.7 Material Adverse Change. There shall have been no event which either
individually or in the aggregate could reasonably be expected to have a Material
Adverse Effect on AMG and its Affiliates taken as a whole on a consolidated
basis and the Company shall be provided with a certificate from the President,
Executive Vice President or any Senior Vice President of AMG to that effect at
the Closing. Notwithstanding the foregoing, this Section 9.7 shall not apply to
entrance into any letter of intent, commitment letter, contract or other
agreement with respect to, or the incurrence of any debt, claim or obligation
arising from, (i) debt and/or equity financings which AMG is negotiating, or may
have negotiated, or (ii) investments in investment management companies which
AMG is negotiating or may have negotiated, which investments have not closed, or
(iii) the properties, assets, liabilities,
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operations, business or prospects relating to any investment of AMG, which
investment may not have closed.
SECTION 10. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED.
10.1 Termination. At any time prior to the Closing, this Agreement may be
terminated as follows:
(a) by mutual written consent of AMG and the Company;
(b) by AMG, pursuant to written notice by AMG to the Company and the
Stockholders, if any of the conditions set forth in Section 8 of this Agreement
have not been satisfied at or prior to June 30, 1998, (as extended pursuant to
Section 8.1 and Section 9.1) or if it has become reasonably and objectively
certain that any of such conditions, will not be satisfied at or prior to June
30, 1998, such written notice to set forth such conditions which have not been
or will not be so satisfied; and
(c) by the Company, pursuant to written notice by the Company to
AMG, if any of the conditions set forth in Section 9 of this Agreement have not
been satisfied at or prior to June 30, 1998 (as extended pursuant to Section 8.1
and Section 9.1), or if it has become reasonably and objectively certain that
any of such conditions, will not be satisfied at or prior to June 30, 1998 (as
extended pursuant to Section 8.1 and Section 9.1), such written notice to set
forth such conditions which have not been or will not be so satisfied.
10.2 Effect of Termination. All obligations of the parties hereunder shall
cease upon any termination pursuant to Section 10.1; provided, however, that (a)
the provisions of this Section 10, Sections 5.13, 5.14, 7.2 and the provisions
of Section 14 hereof shall survive any termination of this Agreement; (b)
nothing herein shall relieve any party from any liability for (i) any material
breach of a representation or warranty contained herein (except for such
representations and warranties that are qualified by their terms as to
materiality, which shall be true in all respects), (ii) any failure to perform
and satisfy in all material respects all of the agreements and covenants to be
performed hereunder and under the agreements, documents and instruments
contemplated hereby at or prior to the Closing, (iii) any failure to perform and
satisfy the conditions contained in this Agreement and the other agreements,
documents and instruments contemplated hereby, and (c) any party may proceed as
further set forth in Section 10.3 below.
10.3 Right to Proceed.
(a) Anything in this Agreement to the contrary notwithstanding, if
any of the conditions specified in Section 8 hereof have not been satisfied, AMG
shall have the right to proceed with the transactions contemplated hereby;
provided, however, that if AMG proceeds with the transactions contemplated
hereby notwithstanding the fact that the Company and the
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Majority Stockholders have provided written notice to AMG in a Schedule or
certificate provided pursuant to this Agreement which describes the nature,
scope and extent of the failure of one or more of the conditions specified in
Section 8 hereof to be satisfied, AMG shall, by proceeding, be deemed to have
waived its rights hereunder to the extent of any such disclosure except to the
extent that such matter or claim may give rise to an indemnification right under
the Supplemental Indemnification Agreement.
(b) Anything in this Agreement to the contrary notwithstanding, if
any of the conditions specified in Section 9 hereof have not been satisfied, the
Company and the Majority Stockholders shall have the right to proceed with the
transactions contemplated hereby; provided, however, that if the Company and the
Majority Stockholders proceed with the transactions contemplated hereby
notwithstanding the fact AMG has provided written notice in a Schedule or
certificate provided pursuant to this Agreement or by written notice to the
Company and the Majority Stockholders which describes the nature, scope and
extent of the failure of one or more of the conditions specified in Section 9
hereof to be satisfied, the Company and the Majority Stockholders shall, by
proceeding, be deemed to have waived their rights hereunder to the extent of any
such disclosure.
SECTION 11. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
11.1 Survival of Representations, Warranties and Covenants. Each of the
representations, warranties, agreements, covenants and obligations herein or in
any schedule, exhibit or certificate delivered by any party to any other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing until
the eighteen month anniversary of the date of the Closing, except for the
representations and warranties made (a) in Sections 3.9 and 3.24, (b) in Section
5A and (c) in any way affecting or relating to the Shareholders Agreement, which
shall survive until the expiration of the applicable statute of limitations, if
any. The expiration of any representation or warranty shall not affect any claim
made in reasonable detail prior to the date of such expiration. All covenants
herein not fully performed shall survive the Closing and continue thereafter
until fully performed. Any investigation, audit or other examination that may
have been made or may be made at any time by or on behalf of the party to whom
any such representation or warranty is made shall not limit or diminish such
representations and warranties, and the parties may rely on the representations
and warranties set forth in this Agreement irrespective of any information
obtained by them by any investigation, audit or examination or otherwise.
11.2 Regulatory Filings. Each of the Stockholders will cooperate with AMG
and Merger Sub to enable AMG and Merger Sub to make any and all regulatory
filings required by them with respect to the Company, Merger Sub, the LLC or the
transactions contemplated hereby (including, by way of example and not of
limitation, the filing of tax returns and the withdrawal of the Company as an
investment adviser).
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SECTION 12. INDEMNIFICATION.
12.1 Indemnification by the Majority Stockholders. From and after the
Closing the Majority Stockholders agree, jointly and severally, to indemnify and
hold AMG, Merger Sub and their respective subsidiaries and affiliates
(including, from and after the Closing, the Company and, to the extent the loss
is suffered by the LLC, the LLC) and persons serving as officers, directors,
partners, members, stockholders or employees thereof (individually an "AMG
Indemnified Party" and collectively the "AMG Indemnified Parties") harmless from
and against any damages, liabilities, losses (including, without limitation,
diminution in value), taxes, fines, penalties, costs, and expenses (including,
without limitation, reasonable fees and expenses of counsel) of any kind or
nature whatsoever (whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing) (collectively, "Losses") (provided, however, that the measure of Loss
shall not include the diminution in trading value of the Common Stock, par value
$.01 per share, of AMG), net, in the case of each AMG Indemnified Party, of any
insurance proceeds actually received by that AMG Indemnified Party on account of
insurance policies the premiums on which were paid by the Company prior to the
LLC Contribution or by the LLC, less the aggregate premiums paid by the LLC for
such insurance, which may be sustained or suffered by any of them arising out of
or based upon any of the following matters:
(a) fraud, intentional misrepresentation or a deliberate or wilful
breach by the Company or any Stockholder of any of their representations,
warranties or covenants under this Agreement or any agreement, document or
instrument contemplated hereby or in any certificate, schedule or exhibit
delivered pursuant hereto or thereto;
(b) any breach of any representation, warranty or covenant of the
Company or any Stockholder under this Agreement or under any agreement, document
or instrument contemplated hereby, or in any certificate, schedule or exhibit
delivered pursuant hereto or thereto, or by reason of any claim, action or
proceeding asserted or instituted growing out of any matter or thing
constituting such a breach; and
(c) the activities, conduct, business or operation of the Company or
the LLC prior to the Closing, or arising out of facts, events or circumstances
regarding the Company or the LLC existing prior to the Closing (including,
without limitation, whether or not disclosure of such facts, events or
circumstances was made herein or on the Schedules hereto) other than executory
obligations to be performed after the Closing that arise pursuant to the
obligations expressly assumed by the LLC pursuant to the LLC Contribution.
12.2 Limitations on Indemnification by the Majority Stockholders.
Notwithstanding any other provision of this Agreement to the contrary, the right
of AMG Indemnified Parties to indemnification under Section 12.1 shall be
subject to the following provisions:
(a) No indemnification shall be payable to any AMG Indemnified Party
pursuant to Subsection 12.1(b) or 12.1(c) unless the total of all claims for
indemnification
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pursuant to Section 12.1 shall exceed five hundred thousand dollars ($500,000)
in the aggregate, whereupon only amounts of such claims in excess of such amount
shall be recoverable in accordance with the terms hereof provided, however, that
this limitation shall not apply to claims for indemnification (i) pursuant to
Section 5A, except to the extent that indemnification for Tax matters do not
exceed twenty five thousand dollars ($25,000), (ii) in connection with claims
arising out of the Escrow Agreement or which had been contemplated to be
transferred to the escrow agent pursuant to the Escrow Agreement and Section 2.1
hereof or (iii) subject to the Supplemental Indemnification Agreement;
(b) No indemnification shall be payable to any AMG Indemnified Party
by any individual Majority Stockholder under Section 12.1(b) or 12.1(c)
(exclusive of any claims for indemnification for Taxes or based upon or related
to breach of any representation, warranty or covenant with respect to Taxes or
Tax matters or pursuant to Section 5A hereof or any representation, warranty or
covenant with respect to Employee Programs or matters related to Employee
Programs) after the payments made by such Majority Stockholder to AMG
Indemnified Parties under this Section 12 equals or exceeds the amount set forth
opposite such Majority Stockholder's name on Schedule 12.2(a) (it being
understood that amounts payable with respect to indemnification for Taxes or
based upon or related to breach of any representation, warranty or covenant with
respect to Taxes or Tax matters or pursuant to Section 5A hereof or any
representation, warranty or covenant with respect to Employee Programs or
matters related to Employee Programs or under the Supplemental Indemnification
Agreement shall not be subject to this limitation or considered for purposes of
this calculation); and
(c) No indemnification shall be payable to an AMG Indemnified Party
with respect to claims asserted pursuant to Subsection 12.1(b) or 12.1(c) after
the eighteen month anniversary of the date of the Closing (the "Indemnification
Cut-Off Date"); provided, however, that such expiration shall not affect any
claim with respect to which notice was given in the manner contemplated by
Section 12.5 hereof prior to the Indemnification Cut-Off Date and claims for
indemnification for Taxes or based upon or related to a breach of any
representation, warranty or covenant with respect to Taxes or pursuant to
Section 5A hereof or Employee Programs or Tax matters or matters related to
Employee Programs or under Supplemental Indemnification Agreement shall continue
until the expiration of all applicable statutes of limitation with respect
thereto.
12.3 Indemnification by AMG. AMG agrees to indemnify and hold the Majority
Stockholders (individually a "Stockholder Indemnified Party" and collectively
the "Stockholder Indemnified Parties") harmless from and against any damages,
liabilities, losses, taxes, fines, penalties, costs and expenses (including,
without limitation, reasonable fees and expenses of counsel) of any kind or
nature whatsoever (whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing) which may be sustained or suffered by any of them arising out of or
based upon any breach of any representation, warranty or covenant made by AMG in
this Agreement or in any agreement, document or instrument contemplated hereby,
or in any certificate, schedule or
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exhibit delivered pursuant hereto or thereto, or by reason of any claim, action
or proceeding asserted or instituted growing out of any matter or thing
constituting such a breach.
12.4 Limitation on Indemnification by AMG. Notwithstanding the foregoing,
the right of Stockholder Indemnified Parties to indemnification under Section
12.3 shall be subject to the following provisions:
(a) No indemnification pursuant to Section 12.3 shall be payable to
the Stockholder Indemnified Parties, unless the total of all claims for
indemnification pursuant to Section 12.3 shall exceed five hundred thousand
dollars ($500,000) in the aggregate, whereupon only amounts of such claims in
excess of such amount shall be recoverable in accordance with the terms hereof;
and
(b) No indemnification pursuant to Section 12.3 shall be payable to
a Stockholder Indemnified Party after the payments made by AMG to Stockholder
Indemnified parties under this Section 12 equal or exceed forty million dollars
($40,000,000); and
(c) No indemnification shall be payable to the Stockholders with
respect to claims asserted pursuant to Section 12.3 above after the
Indemnification Cut-Off Date; provided, however, that such expiration shall not
affect any claim with respect to which notice was given in the manner
contemplated by Section 12.5 hereof prior to the Indemnification Cut-Off Date.
12.5 Notice; Defense of Claims. An indemnified party may make claims for
indemnification hereunder by giving written notice thereof to the indemnifying
party within the period in which indemnification claims can be made hereunder.
If indemnification is sought for a claim or liability asserted by a third party,
the indemnified party shall also give written notice thereof to the indemnifying
party promptly after it receives notice of the claim or liability being
asserted, but the failure to do so shall not relieve the indemnifying party from
any liability except to the extent that it is prejudiced by the failure or delay
in giving such notice. Such notice shall include a reasonable summary of the
bases for the claim for indemnification and any claim or liability being
asserted by a third party. Within thirty (30) days after receiving such notice
the indemnifying party shall give written notice to the indemnified party
stating whether it disputes the claim for indemnification and whether it will
defend against any third party claim or liability at its own cost and expense.
If the indemnifying party fails to give notice that it disputes an
indemnification claim within thirty (30) days after receipt of notice thereof,
it shall be deemed to have accepted and agreed to the claim, which shall become
immediately done and payable. The indemnifying party shall be entitled to direct
the defense against a third party claim or liability with counsel selected by it
(subject to the consent of each indemnified party, which consent shall not be
unreasonably withheld) as long as the indemnifying party is conducting a good
faith and diligent defense. Each indemnified party shall at all times have the
right to fully participate in the defense of a third party claim or liability at
its own expense directly or through counsel; provided, however, that if the
named parties to the action or proceeding include either both the indemnifying
party
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and/or one or more indemnified parties and an indemnified party is advised that
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, an indemnified party may engage
separate counsel at the expense of the indemnifying party. If no such notice of
intent to dispute and defend a third party claim or liability is given by the
indemnifying party, or if such good faith and diligent defense is not being or
ceases to be conducted by the indemnifying party, the indemnified party shall
have the right, at the expense of the indemnifying party to, after three (3)
business days notice to the indemnifying party of its intent to do so, to
undertake the defense of such claim or liability (with counsel selected by the
indemnified party), and to compromise or settle it, exercising reasonable
business judgment. If the third party claim or liability is one that by its
nature cannot be defended solely by the indemnifying party, then the indemnified
party shall make available such information and assistance as the indemnifying
party may reasonably request and shall cooperate with the indemnifying party in
such defense, at the expense of the indemnifying party.
12.6 Satisfaction of Indemnification Obligations.
(a) In order to satisfy the indemnification obligations of the
Majority Stockholders pursuant to Section 12.1 above, an AMG Indemnified Party
shall have the right (in addition to collecting directly from the Majority
Stockholders) to set off its indemnification claims against (i) any and all
amounts of interest and principal under any promissory note issued to such
Stockholder pursuant to the provisions of Section 3.11 of the Restated LLC
Agreement (whether or not then due and payable) in accordance with the terms of
such note, and/or (ii) any and all amounts to be distributed to such Majority
Stockholder by the LLC, whether or not such right of set-off is specifically
provided for in the Restated LLC Agreement and/or (iii) any and all amounts owed
or which become owed to such Majority Stockholder or any Permitted Transferee
(as such term is defined in the Restated LLC Agreement) of such Majority
Stockholder by AMG, the Company or the LLC pursuant to the provisions of
Sections 3.11 or 7.1 of the Restated LLC Agreement.
(b) In connection with indemnification obligations of the Majority
Stockholders pursuant to Section 12.1 above, on the date on which any amount is
payable by a Majority Stockholder to an AMG Indemnified Party pursuant to this
Section 12, such Majority Stockholder shall pay such amount to such AMG
Indemnified Party as follows:
(i) such Majority Stockholder shall pay such AMG Indemnified
Party an amount in cash (by wire transfer of immediately available funds)
equal to the amount payable by such Majority Stockholder to such AMG
Indemnified Party on such date, multiplied by sixty percent (60%); and
(ii) such Majority Stockholder shall pay such AMG Indemnified
Party a number of AMG Shares or shares of Common Stock, $.01 par value per
share, of AMG ("AMG Common Stock"), the value of which is equal to the
amount payable by such Majority Stockholder to such AMG Indemnified Party
on such date, multiplied
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by forty percent (40%), with each such AMG Share or share of Common Stock
being free of any Claims. For purposes of the preceding sentence, each AMG
Share and each share of AMG Common Stock shall be considered to have a
value of twenty-six dollars and fifty cents ($26.50) per share (as
appropriately adjusted for stock splits, stock dividends and the like). If
a Majority Stockholder fails to deliver the number of AMG Shares or shares
of AMG Common Stock on the date and in the manner set forth in clause (ii)
above (including, without limitation, being free of any Claims) then such
Majority Stockholder shall be required to fulfill the payment obligation
in cash together with an additional payment of ten percent (10%) of such
payment obligation (which payments shall immediately be made by wire
transfer of immediately available funds) and, thereafter, such Majority
Stockholder shall be required to fulfill all payment obligations under
this Section 12 in full, in cash (by wire transfer of immediately
available funds).
12.7 Procedure. In the event that AMG makes any claim for indemnification
pursuant to this Section 12, AMG shall use commercially reasonable efforts to
pursue such claim against each of the Majority Stockholders in a single action.
The foregoing shall have no effect on the joint and several indemnification
obligations of the Majority Stockholders hereunder.
12.8 Exclusive Remedy. Except in the case of claims arising out of, based
upon or related to fraud of the Company or any Majority Stockholder, the
indemnification in this Section 12 shall be the exclusive remedy available to
any indemnified party against any indemnifying party for any Losses arising out
of or based upon the matters set forth in Section 12.1 and 12.3 of this
Agreement, provided, however, that nothing herein shall (i) limit the
non-monetary equitable remedies of any party hereto in respect of any breach of
any covenant or other agreement of any party required to be performed after the
Closing, (ii) limit the right or remedies of any party hereto under Section 5A
hereof, or (iii) limit the rights or remedies of any party hereto under the
Supplemental Indemnification Agreement. Any and all disputes between the parties
(except to the extent non-monetary equitable remedies are sought) shall be
resolved as contemplated in Section 14.2.
SECTION 13. DEFINITIONS.
13.1 Definitions. For purposes of this Agreement and the Exhibits and
Schedules hereto, the following terms shall have the respective meanings set
forth in this Section 13.1
"Adjustment Fractions" shall have the meaning specified in Section
1.7(b) hereof.
"Advisers Act" shall mean the Investment Advisers Act of 1940, as the same
may be amended from time to time, and any successor to such act.
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"Affiliate" shall mean with respect to any person or entity (herein the
"first party"), any other person or entity that directly or indirectly controls,
or is controlled by, or is under common control with, such first party. The term
"control" as used herein (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly, of the power to (a)
vote twenty-five percent (25%) or more of the outstanding voting securities of
such person or entity, or (b) otherwise direct the management or policies of
such person or entity by contract or otherwise.
"AMG" shall mean Affiliated Managers Group, Inc., a Delaware corporation,
or any of its permitted assigns hereunder.
"AMG Indemnified Party" shall have the meaning specified in Section 12.1
hereof.
"AMG Shares" shall have the meaning specified in Section 1.7 hereof.
"Articles of Organization" shall mean the Company's Articles of
Organization, as amended to the date of this Agreement.
"Base Balance Sheet" shall mean the audited balance sheet of the Company
of November 30, 1996.
"Base Fees" shall have the meaning specified in Section 8.3 hereof.
"Certificate of Designations" shall have the meaning specified in
Section 1.7(a) hereof.
"Claims" shall mean any restrictions, liens, claims, charges, security
interests, assignments, mortgages, deposit arrangements, pledges or encumbrances
of any kind or nature whatsoever.
"Class A Stock" shall mean the Company's Class A Non-Voting Common Stock,
par value $1.00 per share.
"Closing" shall have the meaning specified in Section 1.8 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and any successor code thereto. For purposes of this Agreement, all
references to Sections of the Code shall include any predecessor provisions to
such Sections and any similar provisions of federal, state, local or foreign
law.
"Common Stock" shall mean the Company's Common Stock, $.01 par value per
share.
"Company" shall mean Essex Investment Management Company, Inc., a
Massachusetts corporation.
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"Company Shares" shall have the meaning set forth in the preamble hereto,
provided that such number shall be reduced to the extent any Company Shares are
redeemed prior to the Closing pursuant to Section 5.5.
"Consent" shall have the meaning specified in Section 8.3 hereof.
"Contract Value" shall have the meaning specified in Section 8.3 hereof.
"Delaware Act" shall mean the Delaware Limited Liability Company Act, 6
Del. C. ss.18-101, et. seq., as amended from time to time, and any successor to
such act.
"Election Forms" shall have the meaning specified in Section 5A.1.
"Elections" shall have the meaning specified in Section 5A.1.
"Employment Agreement" shall have the meaning specified in Section 8.8
hereof.
"Employment Arrangement" shall have the meaning specified in Section
3.25(c) hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor to such act.
"ERISA Client" shall have the meaning specified in Section 3.7(b) hereof.
"Escrow Agreement" shall have the meaning specified in Section 1.7 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and any successor to such act.
"Existing Certificate of Formation" shall mean the Certificate of
Formation of the LLC, as amended to the date of this Agreement.
"Existing LLC Agreement" shall mean the Limited Liability Company
Agreement of the LLC dated as of January 12, 1998, which is the Limited
Liability Company Agreement of the LLC on the date of this Agreement and
immediately prior to its amendment and restatement into the Restated LLC
Agreement.
"Foreign Fund" shall mean Essex High Technology Fund (Bermuda), L.P.
"Former Shareholders" shall have the meaning set forth in Section 5.12(c)
hereof.
"GAAP" shall mean United States generally accepted accounting principles
as in effect from time to time.
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"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indemnification Cut-Off Date" shall have the meaning specified in Section
12.2(b) hereof.
"Intellectual Property" shall have the meaning set forth in Section
3.14(a) hereof.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
the same may be amended from time to time, and any successor to such act.
"Investment Laws and Regulations" shall have the meaning set forth in
Section 3.17 hereof.
"Investment Management Services" shall mean any services which involve (a)
the management of an investment account or fund (or portions thereof or a group
of investment accounts or funds), or (b) the giving of advice with respect to
the investment and/or reinvestment of assets or funds (or any group of assets or
funds), and activities related or incidental thereto.
"IRS" shall mean the Internal Revenue Service.
"Knowledge" with respect to the Majority Stockholders and the Company
shall mean, in the case of the "knowledge" of the Company, the actual knowledge
of each employee of the Company, and, in the case of the knowledge of any
Majority Stockholder, the actual knowledge of each of the Stockholders, whether
or not they are a party to this Agreement.
"Leased Real Property" shall have the meaning specified in Section 3.6(a)
hereof.
"Licenses" shall have the meaning specified in Section 3.18(b) hereof.
"LLC" shall mean Essex Investment Management Company, LLC, a Delaware
limited liability company.
"LLC Contribution" shall have the meaning specified in Section 2.1 hereof.
"LLC Contribution Agreement" shall have the meaning specified in Section
2.1 hereof.
"Loss or Losses" shall have the meaning specified in Section 12.1 hereof.
"Material Adverse Effect" shall mean, with respect to a Person, a material
adverse effect on the condition (financial or otherwise), properties, assets,
liabilities, business, operations or prospects of such Person.
63
<PAGE>
"Merger" shall have the meaning specified in Section 1.1 hereof.
"Merger Consideration" shall have the meaning specified in Section 1.7
hereof.
"Merger Sub" shall have the meaning specified in the preamble hereof.
"Mutual Funds" shall mean Capital Appreciation Fund, a series of the
Managers Funds, a Massachusetts business trust, which to the knowledge of the
Company and the Majority Stockholders is duly registered under the Investment
Company Act.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Non Solicitation Agreement" shall mean a Non Solicitation/Non Disclosure
Agreement substantially in the form attached hereto as Exhibit 8.9.
"Owned Real Property" shall have the meaning specified in Section 3.6(a)
hereof.
"Person" shall mean any individual, partnership (general or limited),
corporation, limited liability company, limited liability partnership,
association, trust, joint venture, unincorporated organization, and any
government, governmental department or agency or political subdivision thereof.
"Preliminary Injunction Motion" shall have the meaning specified in
Section 8.1 hereof.
"Private Funds" shall mean Essex Flexport Fund, Limited Partnership (Small
Cap Pool, Mid Cap Pool, Large Cap Pool), Corn Hill Series Fund, Limited
Partnership (High Performance, Growth) Essex Safe Harbor Fund, Limited
Partnership, Essex Performance Fund, Limited Partnership, Essex Special Growth
Opportunities Fund, L.P., Essex High Technology Fund, L.P., Spruce Investment
Partners, L.P. and The New Discovery Fund Limited.
"Real Property" shall have the meaning specified in Section 3.6(a) hereof.
"Redemption Agreement" shall have the meaning specified in Section 1.3
hereof.
"Restated LLC Agreement" shall mean the Amended and Restated Limited
Liability Company Agreement of the LLC in substantially the form attached hereto
as Exhibit 2.2, as the same may be amended from time to time in accordance with
its terms.
"SEC" shall mean the Securities and Exchange Commission, or any successor
agency thereto.
64
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as the same may be
amended from time to time, and any successor to such act.
"Shareholders Agreement" shall have the meaning specified in Section 8.1
hereof.
"Stockholder" shall mean a holder of the Company's capital stock listed on
Schedule 1.7 hereto.
"Stockholder Indemnified Party" shall have the meaning specified in
Section 12.3 hereof.
"Supplemental Purchase Agreement" shall mean the Purchase Agreement in the
form of Exhibit 1.12 by and between the parties hereto and each Stockholder.
"Supplemental Indemnification Agreement" shall have the meaning set forth
in Section 8.12(o) hereof.
"Surviving Corporation" shall have the meaning set forth in Section 1.1
hereof.
"Taxes" shall have the meaning specified in Section 3.9(a) hereof.
"Taxing Authority" shall have the meaning specified in Section 3.9(c)
hereof.
"Valuation" shall mean the value of the AMG Shares determined by an
independent party retained by AMG and the Company to calculate the value of the
AMG Shares for federal income tax and other purposes.
"Valuation Report" shall mean the report prepared by the independent party
pursuant to the Valuation.
SECTION 14. MISCELLANEOUS.
14.1 Fees and Expenses. The rights and obligations of the parties hereto
with respect to fees and expenses, except to the extent expressly set forth
herein, are as follows:
(a) AMG shall pay its own expenses incident to the negotiation and
consummation of the transactions contemplated by this Agreement and the
agreements, instruments and documents contemplated hereby. The Stockholders and
the Company shall pay their own expenses and the expenses of the Company and the
LLC incident to the negotiation and consummation of the transactions
contemplated by this Agreement and the agreements, instruments and documents
contemplated hereby; provided, however, that AMG shall pay (i) the
organizational costs of the LLC including the filing fees of the LLC the
65
<PAGE>
various states to the extent the LLC has presented AMG with an invoice therefor
at or prior to the Closing, and (ii) fifty percent (50%) any filing fees
required under the HSR Act. In addition, the Company shall pay fifty percent
(50%) of any filing fees required under the HSR Act.
(b) The Stockholders will pay all costs incurred, whether at or
subsequent to the Closing, in connection with the transfer of the Company Shares
to AMG as contemplated by this Agreement, including without limitation, all
transfer taxes and charges applicable to such transfer, and all costs of
obtaining permits, waivers, registrations or consents with respect to any
assets, rights or contracts of the Company.
14.2 Dispute Resolution. The parties agree that from and after the
Closing, any and all disputes, claims, or controversies between them arising out
of or relating to this Agreement including the Exhibits hereto (except to the
extent otherwise set forth therein) and the transactions contemplated hereby
that are not resolved by their mutual agreement shall be resolved by binding
arbitration in accordance with the applicable rules of the American Arbitration
Association. The arbitration shall be held in Massachusetts before a single
arbitrator selected in accordance with Section 12 of the American Arbitration
Association Commercial Arbitration Rules (and, if practicable shall have
experience in the investment advisory industry) and shall otherwise be conducted
in accordance with the American Arbitration Association Commercial Arbitration
Rules. The parties covenant that they will participate in the arbitration in
good faith and that they will share equally its costs except as otherwise
provided herein. This clause applies equally to requests for temporary,
preliminary or permanent injunctive relief, except that in the case of temporary
or preliminary injunctive relief any party may proceed in court without prior
arbitration, if they first obtain a decision from the arbitrator to so proceed.
The provisions of this Section 14.2 shall be enforceable in any court of
competent jurisdiction, and the parties shall bear their own costs in the event
of any proceeding to enforce this Agreement except as otherwise provided herein.
The arbitrator may in his or her discretion assess costs and expenses (including
the reasonable legal fees and expenses of the prevailing party) against any
party to a proceeding. Any party unsuccessfully refusing to comply with an order
of the arbitrators shall be liable for costs and expenses, including attorneys'
fees, incurred by the other party in enforcing the award. The provisions of this
Section 14.2 shall not apply from the date of this Agreement through the date of
the Closing.
14.3 Waivers. Any waiver of any terms or conditions or of the breach of
any covenant, representation or warranty of this Agreement in any one instance,
shall not operate as or be deemed to be or construed as a further or continuing
waiver of any other breach of such term, condition, covenant, representation or
warranty or any other term, condition, covenant, representation or warranty, nor
shall any failure or delay at any time or times to enforce or require
performance of any provision hereof operate as a waiver of or affect in any
manner such party's right at a later time to enforce or require performance of
such provision or of any provision hereof; provided, however, that no such
waiver, unless it, by its own terms, explicitly provides to the contrary, shall
be construed to effect a continuing waiver of the
66
<PAGE>
provision being waived and no such waiver in any instance shall constitute a
waiver in any other instance or for any other purpose or impair the right of the
party against whom such waiver is claimed in all other instances or for all
other purposes to require full compliance.
14.4 Governing Law. This Agreement shall be construed under and governed
by the internal laws of the Commonwealth of Massachusetts without regard to its
conflict of laws provisions.
14.5 Notices. Any notice, request, demand or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been
given if delivered or sent by facsimile transmission, upon receipt, or if sent
by registered or certified mail, upon the sooner of the date on which receipt is
acknowledged or the expiration of three days after deposit in United States post
office facilities properly addressed with postage prepaid. All notices to a
party will be sent to the addresses set forth below or to such other address or
person as such party may designate by notice to each other party hereunder:
TO AMG: Affiliated Managers Group, Inc.
Two International Place, 23rd Floor
Boston, MA 02110
Attn: Nathaniel Dalton, Senior Vice President
Facsimile No.: (617) 747-3380
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: Elizabeth Shea Fries
Facsimile No.: (617) 523-1231
TO MERGER SUB: c/o Affiliated Managers Group, Inc.
Two International Place, 23rd Floor
Boston, MA 02110
Attn: Nathaniel Dalton, Senior Vice President
Facsimile No.: (617) 747-3380
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: Elizabeth Shea Fries
Facsimile No.: (617) 523-1231
67
<PAGE>
TO COMPANY: Essex Investment Management Company Inc.
125 High Street, 29th Floor
Boston, MA 02110-2702
Attn: Christopher P. McConnell
Facsimile No.: (617) 342-3392
With a copy to: Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103-2793
Attn: Christopher G. Karras
Facsimile No.: (215) 994-2222
TO ANY STOCKHOLDER: To that Stockholder at the address set
forth under such Stockholder's name as Schedule
1.7.
In each case, with a copy to: Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103-2793
Attn: Christopher G. Karras
Facsimile No.: (215) 994-2222
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
14.6 Entire Agreement; Severability. This Agreement, including the
Schedules and Exhibits referred to herein and the other writings specifically
identified herein or contemplated hereby, is complete, reflects the entire
agreement of the parties with respect to its subject matter, and supersedes all
previous written or oral negotiations, commitments and writings. No promises,
representations, understandings, warranties and agreements have been made by any
of the parties hereto except as referred to herein or in such Schedules and
Exhibits or in such other writings; and all inducements to the making of this
Agreement and the transactions contemplated hereby which were relied upon by
either party hereto have been expressed herein or in such Schedules or Exhibits
or in such other writings. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
14.7 Assignability; Binding Effect. This Agreement or any of the
obligations or rights hereunder (a) may not be assigned by AMG or Merger Sub,
without the prior written consent of the Company, other than to an entity under
the control of AMG, and (b) may not be
68
<PAGE>
assigned by any of the Majority Stockholders or the Company without the prior
written consent of AMG. This Agreement shall be binding upon and enforceable by,
and shall inure to the benefit of, the parties hereto and their respective
successors, heirs, executors, administrators and permitted assigns.
14.8 Captions and Gender. The captions in this Agreement are for
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
as the context may require.
14.9 Execution in Counterparts. For the convenience of the parties and to
facilitate execution, this Agreement may (a) be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document, and (b) executed by facsimile.
14.10 Amendments. This Agreement may not be amended or modified, nor may
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by AMG and the Company and the Majority
Stockholders, or in the case of a waiver, the party waiving compliance.
14.11 Publicity and Disclosures. No press releases or public disclosure,
either written or oral, of the transactions contemplated by this Agreement,
shall be made by a party to this Agreement without the prior knowledge and
written consent of AMG and the Company, which consent shall not be unreasonably
withheld, except as is otherwise required by applicable laws, rules and
regulations (including, without limitation, the HSR Act, the Securities Act, the
Exchange Act and the rules and regulations promulgated thereunder).
14.12 Consent to Jurisdiction. Each of the parties hereby consents to
personal jurisdiction, service of process and venue in the federal or state
courts of the Commonwealth of Massachusetts for any claim, suit or proceeding
arising under this Agreement, or in the case of a third party claim subject to
indemnification hereunder, in the court where such claim is brought and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such state court or, to the extent permitted by law,
in such federal court. Each of the parties hereby irrevocably consents to the
service of process in any such action or proceeding by the mailing by certified
mail of copies of any service or copies of the summons and complaint and any
other process to such party at the address specified in Section 14.5 hereof. The
parties agree that a final judgement in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit or in any other
manner permitted by law and shall affect the right of a party to service legal
process or to bring any action or proceeding in the carts of other
jurisdictions.
14.13 Guarantee. AMG shall cause Merger Sub to perform and carry out its
obligations under, and the transactions contemplated by, this Agreement.
69
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
AMG:
AFFILIATED MANAGERS GROUP, INC.
By: /s/ William J. Nutt
----------------------------
Name: William J. Nutt
Title: President and Chief Executive
Officer
MERGER SUB:
CONSTITUTION MERGER SUB, INC..
By: /s/ Sean M. Healey
----------------------------
Name: Sean M. Healey
Title: President
COMPANY:
ESSEX INVESTMENT MANAGEMENT
COMPANY, INC.
By: /s/ Joseph C. McNay
----------------------------
Name: Joseph C. McNay
Title: Chairman
70
<PAGE>
STOCKHOLDERS:
/s/ Joseph C. McNay
-------------------------------
Joseph C. McNay
/s/ Stephen D. Cutler
-------------------------------
Stephen D. Cutler
/s/ Stephen R. Clark
-------------------------------
Stephen R. Clark
71
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.8
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 2.8
<TEXT>
<PAGE>
EXHIBIT 2.8
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
AMENDMENT entered into as of March 19, 1998, by and among Affiliated
Managers Group, Inc., a Delaware corporation ("AMG"), Constitution Merger
Sub, Inc., a Massachusetts corporation and a wholly owned subsidiary of AMG
("Merger Sub"), Essex Investment Management Company, Inc., a Massachusetts
corporation (the "Company"), and the holders of the Company's capital stock
party hereto collectively referred to as the "Majority Stockholders" and,
each individually as a "Majority Stockholder").
WHEREAS, the parties hereto are parties to a certain Agreement and Plan of
Reorganization dated January 15, 1998 (the "Merger Agreement") (capitalized
terms used herein and not defined shall have the meanings ascribed to them in
the Merger Agreement); and
WHEREAS, the parties do not require an escrow of any portion of the Merger
Consideration and desire to amend the Merger Agreement to eliminate all
reference to the Escrow Agent and the Escrow Agreement and make certain
additional amendments as provided herein.
NOW THEREFORE, the parties hereto agree as follows:
1. The text of Section 1.3 of the Merger Agreement shall be amended by
adding the following at the end of the existing provision: "In furtherance of
and not in limitation of the foregoing, each of the shares of capital stock of
Merger Sub issued and outstanding immediately prior to the Effective time, and
all rights attached thereto, shall, by virtue of this Agreement and without any
action on the part of the holder thereof, be converted into one share of Common
Stock of the Surviving Corporation at the Effective Time."
2. The text of Section 1.7(a) of the Merger Agreement shall be deleted in
its entirety and replaced with the following:
"(a) At the Effective Time, all of the shares of Company Common Stock
and all of the shares of Company Class A Stock issued and outstanding
immediately prior to the Effective Time and all rights attached thereto, shall,
by virtue of this Agreement and without any action on the part of the holder
thereof, be converted into the right to receive, subject to adjustment as
provided in this Section 1.7: (i) cash in an aggregate amount equal to
sixty-nine million six hundred thousand dollars ($69,600,000); and (ii) one
million seven hundred fifty thousand nine hundred forty two (1,750,942) shares
of AMG's Series C Non-Voting Convertible Stock, $.01 par value per share (the
"AMG Shares" and, together with such cash, the "Merger Consideration"),
established and designated under the Certificate of Designations of AMG attached
hereto as Exhibit 1.7A (the "Certificate of Designations"). The aggregate
amount of cash Merger Consideration to be received by the Stockholders shall be
reduced by the amount of obligations of the Company assumed, or payments made,
on behalf of the
<PAGE>
Stockholders and the Company at the Closing, which amounts are set forth on
Schedule 1.7. At the Effective Time, the Merger Consideration shall be
allocated among and paid to the Stockholders and other Persons listed on
Schedule 1.7 in accordance with said Schedule."
3. Schedule 1.7 to the Merger Agreement shall be replaced in its entirety
by Schedule 1.7 attached hereto.
4. Exhibit 1.7 to the Merger Agreement shall be replaced in its entirety
by Exhibit 1.7 attached hereto.
5. The text of Section 1.8 of the Merger Agreement shall be deleted in
its entirety and replaced with the following:
"(a) In the event that any Client which (a) has a contract that
neither prohibits assignment by its terms nor terminates by its terms upon
consummation of the transactions contemplated hereby does not Consent at or
prior to the Closing (and AMG in its sole discretion does not elect to treat
such client as having Consented at the Closing), then (a) such Client shall be
treated, for purposes of calculating the Merger Consideration hereunder, as
having withdrawn its assets, but the Company or the LLC may continue to provide
services to such Client and (b) in the event that, as of the date that is sixty
(60) days after the date of the Closing, the Company or the LLC is able to
obtain the Consent of such Client, then the Company shall make an additional
payment to the Stockholders in accordance with Schedule 1.7.
(b) In the event that any Client which has a contract that prohibits
assignment by its terms or terminates by its terms upon consummation of the
transactions contemplated hereby does not Consent at or prior to the Closing
(and AMG in its sole discretion does not elect to treat such client as having
Consented at Closing), then (a) such Client shall be treated, for purposes of
calculating the Merger Consideration hereunder, as having withdrawn its assets,
but the Company or the LLC may continue to provide services to such Client and
(b) in the event that, as of or prior to the date that is sixty (60) days after
the date of the Closing, the LLC is able to enter into a contract with such
Client with substantially identical terms, then the Company shall make an
additional payment to the Stockholders in accordance with Schedule 1.7."
6. The first sentence of Section 2.1 of the Merger Agreement shall be
deleted in its entirety.
7. The text of Section 3.21 of the Merger Agreement shall be deleted in
its entirety and replaced with the following:
"Except for fees to McDaniels & Co. (which fees have been disclosed to AMG
and will be paid at the Closing in accordance with Schedule 1.7), none of the
Company, the LLC or any Stockholder has incurred or become liable for any
broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement."
<PAGE>
8. The header to Section 3.24 of the Merger Agreement shall be deleted in
its entirety and replaced with the following: "Employee Benefit Programs."
9. Section 5.12(c) of the Merger Agreement shall be amended to delete the
words "Escrow Agreement" and replace them with the words "Release attached
hereto as Exhibit 1.7."
10. Section 6.9 of the Merger Agreement shall be amended by deleting the
words "Exhibit 6.9" and replacing them with the words "Schedule 6.9".
11. Section 7.7 of the Merger Agreement shall be deleted in its entirety
and replaced with the following: "On or promptly following the closing, AMG
shall cause Merger Sub to, or shall on behalf of Merger Sub, make an additional
contribution to the capital of the LLC as contemplated in Section 4.1 of the
Restated LLC Agreement to fund contributions by the LLC to the Private Funds as
contemplated thereby, provided that such amount shall not exceed $225,000."
12. Sections 8.4 and 8.12(n) of the Merger Agreement shall be deleted in
their entirety.
13. Section 8.11 of the Merger Agreement shall be deleted in its entirety
and replaced with the following:
"The Company's capitalization including ownership of capital stock and
options to purchase shares of capital stock shall be as set forth on Schedule
1.7 and Schedule 3.3. The LLC's capitalization, including capital and profits
interests and other rights to purchase interests in the LLC shall be as set
forth in Schedule 3.4(b)(ii). At the Closing, and after giving effect to the
transactions contemplated by Schedule 1.7, the LLC Contribution and all
transaction costs of the Company and the LLC, the LLC shall have a tangible net
worth (determined in accordance with GAAP) of at least five million four hundred
twenty six thousand dollars ($5,426,000), working capital (defined as current
assets less current liabilities) of at least five million four hundred twenty
six thousand dollars ($5,426,000),which shall be not less than the amount
necessary for the operation of the business of the LLC, consistent with past
practices of the Company, and cash on hand of at least five million four hundred
twenty six thousand dollars ($5,426,000). AMG shall be provided with a
certificate from the Vice President and Chief Financial Officer of the Company
and at the closing representing that the foregoing is true and correct.
14. The text of Section 12.2(a) of the Merger Agreement shall be deleted
in its entirety and replaced with the following:
"No indemnification shall be payable to any AMG Indemnified Party
pursuant to Subsection 12.1(b) or 12.1(c) unless the total of all claims for
indemnification pursuant to Section 12.1 shall exceed five hundred thousand
dollars ($500,000) in the aggregate, whereupon only amounts of such claims in
excess of such amount shall be recoverable in
<PAGE>
accordance with the terms hereof provided, however, that this limitation shall
not apply to claims for indemnification (i) pursuant to Section 5A, except to
the extent that indemnification for Tax matters do not exceed twenty five
thousand dollars ($25,000), (ii) in connection with claims by any Person in
connection with the payments made in accordance with Schedule 1.7, or (iii)
subject to the Supplemental Indemnification Agreement;"
15. The parties agree that, notwithstanding any other provision of this
Agreement, the Closing shall occur on March 20, 1998.
16. Except as amended by the provisions of this Amendment, the Merger
Agreement, together with all Exhibits and Schedules thereto, shall remain in
full force and effect, without modification or waiver.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed as of the date set forth above by their duly authorized
representatives.
AFFILIATED MANAGERS GROUP, INC.
By: /s/ Nathaniel Dalton
---------------------------
Name: Nathaniel Dalton
Title: Senior Vice President
CONSTITUTION MERGER SUB, INC..
By: /s/ Nathaniel Dalton
---------------------------
Name: Nathaniel Dalton
Title: Clerk
ESSEX INVESTMENT MANAGEMENT
COMPANY, INC.
By: /s/ Christopher P. McConnell
---------------------------
Name: Christopher P. McConnell
Title: Vice President and
Chief Financial Officer
/s/ Joseph C. McNay
---------------------------
Joseph C. McNay
/s/ Stephen D. Cutler
---------------------------
Stephen D. Cutler
/s/ Stephen R. Clark
---------------------------
Stephen R. Clark
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 4.2
<TEXT>
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
among
Affiliated Managers Group, Inc.
The Several Lenders
from Time to Time Parties Hereto
NationsBank, N.A.,
as Documentation Agent
and
The Chase Manhattan Bank,
as Administrative Agent
Dated as of December 22, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
-----
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Other Definitional Provisions . . . . . . . . . . . . . . . . 15
SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS. . . . . . . 15
2.1 Revolving Credit Commitments. . . . . . . . . . . . . . . . . 15
2.2 Procedure for Borrowing . . . . . . . . . . . . . . . . . . . 15
2.3 Increase of Commitments . . . . . . . . . . . . . . . . . . . 16
2.4 Commitment Fee. . . . . . . . . . . . . . . . . . . . . . . . 17
2.5 Termination or Reduction of Commitments . . . . . . . . . . . 17
2.6 Repayment of Loans; Evidence of Debt. . . . . . . . . . . . . 17
SECTION 3. GENERAL PROVISIONS APPLICABLE TO THE LOANS. . . . . . . . . . 18
3.1 Optional Prepayments. . . . . . . . . . . . . . . . . . . . . 18
3.2 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . 18
3.3 Conversion and Continuation Options . . . . . . . . . . . . . 19
3.4 Minimum Amounts and Maximum Number of Tranches. . . . . . . . 19
3.5 Interest Rates and Payment Dates. . . . . . . . . . . . . . . 20
3.6 Computation of Interest and Fees. . . . . . . . . . . . . . . 20
3.7 Inability to Determine Interest Rate. . . . . . . . . . . . . 20
3.8 Pro Rata Treatment and Payments . . . . . . . . . . . . . . . 21
3.9 Illegality. . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.10 Requirements of Law . . . . . . . . . . . . . . . . . . . . . 22
3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.12 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.13 Change of Lending Office. . . . . . . . . . . . . . . . . . . 25
SECTION 4. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . 25
4.1 Financial Condition . . . . . . . . . . . . . . . . . . . . . 25
4.2 No Change . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.3 Corporate Existence; Compliance with Law. . . . . . . . . . . 26
4.4 Corporate Power; Authorization; Enforceable Obligations . . . 26
4.5 No Legal Bar. . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 No Material Litigation. . . . . . . . . . . . . . . . . . . . 27
4.7 No Default. . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.8 Ownership of Property; Liens. . . . . . . . . . . . . . . . . 27
4.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.10 Federal Regulations . . . . . . . . . . . . . . . . . . . . . 27
4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.12 Investment Company Act. . . . . . . . . . . . . . . . . . . . 28
4.13 Investment Advisory Agreements. . . . . . . . . . . . . . . . 28
4.14 Subsidiaries and Other Ownership Interests. . . . . . . . . . 29
-i-
<PAGE>
4.15 Purpose of Loans. . . . . . . . . . . . . . . . . . . . . . . 29
4.16 Accuracy and Completeness of Information. . . . . . . . . . . 29
SECTION 5. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . 29
5.1 Conditions to Initial Loans . . . . . . . . . . . . . . . . . 29
5.2 Conditions to Each Loan . . . . . . . . . . . . . . . . . . . 32
SECTION 6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 32
6.1 Financial Statements. . . . . . . . . . . . . . . . . . . . . 32
6.2 Certificates; Other Information . . . . . . . . . . . . . . . 33
6.3 Payment of Obligations. . . . . . . . . . . . . . . . . . . . 34
6.4 Conduct of Business and Maintenance of Existence. . . . . . . 34
6.5 Maintenance of Property; Insurance. . . . . . . . . . . . . . 34
6.6 Inspection of Property; Books and Records; Discussions. . . . 35
6.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.8 Stock Pledges . . . . . . . . . . . . . . . . . . . . . . . . 36
6.9 Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 36
7.1 Financial Condition Covenants . . . . . . . . . . . . . . . . 36
7.2 Limitation on Indebtedness. . . . . . . . . . . . . . . . . . 37
7.3 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . 38
7.4 Limitation on Guarantee Obligations . . . . . . . . . . . . . 39
7.5 Limitation on Fundamental Changes . . . . . . . . . . . . . . 39
7.6 Limitation on Sale of Assets. . . . . . . . . . . . . . . . . 40
7.7 Limitation on Leases. . . . . . . . . . . . . . . . . . . . . 40
7.8 Limitation on Dividends . . . . . . . . . . . . . . . . . . . 40
7.9 Limitation on Capital Expenditures. . . . . . . . . . . . . . 41
7.10 Limitation on Investments, Loans and Advances . . . . . . . . 41
7.11 Limitation on Payments of Subordinated Indebtedness . . . . . 42
7.12 Restriction on Amendments to Revenue Sharing Agreements . . . 42
7.13 Limitation on Transactions with Affiliates. . . . . . . . . . 42
7.14 Limitation on Changes in Fiscal Year. . . . . . . . . . . . . 42
SECTION 8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 9. THE ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . 45
9.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.2 Delegation of Duties. . . . . . . . . . . . . . . . . . . . . 45
9.3 Exculpatory Provisions. . . . . . . . . . . . . . . . . . . . 45
9.4 Reliance by Administrative Agent. . . . . . . . . . . . . . . 46
9.5 Notice of Default . . . . . . . . . . . . . . . . . . . . . . 46
9.6 Non-Reliance on Administrative Agent and Other Lenders. . . . 46
9.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 47
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9.8 Administrative Agent in Its Individual Capacity . . . . . . . 47
9.9 Successor Administrative Agent. . . . . . . . . . . . . . . . 47
SECTION 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 48
10.1 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . 48
10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.3 No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . . 49
10.4 Survival of Representations and Warranties. . . . . . . . . . 49
10.5 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . 49
10.6 Successors and Assigns; Participations and Assignments. . . . 50
10.7 Adjustments; Set-off. . . . . . . . . . . . . . . . . . . . . 52
10.8 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 53
10.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 53
10.10 Integration . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 53
10.12 Submission To Jurisdiction; Waivers . . . . . . . . . . . . . 53
10.13 Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . 54
10.14 WAIVERS OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . 54
10.15 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 54
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ANNEXES
Annex I - Pricing Grid
SCHEDULES
Schedule I - Lender Commitments
Schedule 4.1 - Financial Condition
Schedule 4.2 - Changes in Capital Stock
Schedule 4.9 - Taxes
Schedule 4.10 - Federal Regulations
Schedule 4.14 - Subsidiaries and Other Ownership Interests
Schedule 7.2(g) - Existing Indebtedness
Schedule 7.3(j) - Existing Liens
Schedule 7.10 - Loans to Management
Schedule 7.13 - Transactions with Affiliates
EXHIBITS
Exhibit A - Form of Note
Exhibit B-1 - Form of Stock Pledge Agreement
Exhibit B-2 - Form of Partnership Pledge Agreement
Exhibit B-3 - Form of Limited Liability Company Pledge Agreement
Exhibit B-4 - Form of Subsidiary Pledge Agreement
Exhibit C - Form of Borrowing Certificate
Exhibit D - Form of Opinion of Borrower's Counsel
Exhibit E - Form of Assignment and Acceptance
Exhibit F - Form of Confidentiality Agreement
Exhibit G - Terms and Conditions of Subordinated Indebtedness
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CREDIT AGREEMENT, dated as of December 22, 1997, among Affiliated
Managers Group, Inc., a Delaware corporation (the "BORROWER"), the several banks
and other financial institutions from time to time parties to this Agreement
(the "LENDERS"), NationsBank, N.A., a national banking association, as
documentation agent (in such capacity, the "DOCUMENTATION AGENT") and The Chase
Manhattan Bank, a New York banking corporation, as administrative agent for the
Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, the Borrower has acquired, and intends to acquire, directly
or indirectly, majority and other equity interests, each an "ACQUISITION") in
investment management companies, each as hereinafter further defined, a
"MANAGEMENT COMPANY"), and such Management Companies intend to acquire, directly
or indirectly, majority and other equity interests (each also an "Acquisition")
in other investment management companies (each also a "MANAGEMENT COMPANY"); and
WHEREAS, the Borrower currently has loans outstanding under the
existing $300,000,000 Credit Agreement, dated as of September 30, 1997 among the
Borrower, the several lenders parties thereto and The Chase Manhattan Bank, as
administrative agent (the "EXISTING FACILITY"); and
WHEREAS, the Borrower has requested loans of up to $285,000,000 (with
such increases as may be permitted hereunder) on a revolving basis to refinance
the Existing Facility, to finance Acquisitions, to pay the related fees and
expenses of the Acquisitions, to finance certain additional costs related to the
Acquisitions and to finance the working capital and business requirements of the
Borrower and its Subsidiaries; and
WHEREAS, the Lenders are willing to make Loans to the Borrower,
subject to the terms and conditions set forth in this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings:
"ABR": for any day, a rate per annum (rounded upwards, if necessary,
to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in
effect on such day, (b) the Base CD Rate in effect on such day plus 1% and
(c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%.
For purposes hereof: "PRIME RATE" shall mean the rate of interest per
annum publicly announced from time to time by the Administrative Agent as
its prime rate in effect at its principal office in New York City (the
Prime Rate not being intended to be the lowest rate of interest charged by
The Chase Manhattan Bank in connection with extensions of credit to
debtors); "BASE CD RATE" shall mean the sum of (a) the product of (i) the
Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which
is one and the denominator of which is one minus the C/D Reserve Percentage
and (b) the C/D
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2
Assessment Rate; "THREE-MONTH SECONDARY CD RATE" shall mean, for any day,
the secondary market rate for three-month certificates of deposit reported
as being in effect on such day (or, if such day shall not be a Business
Day, the next preceding Business Day) by the Board of Governors of the
Federal Reserve System (the "BOARD") through the public information
telephone line of the Federal Reserve Bank of New York (which rate will,
under the current practices of the Board, be published in Federal Reserve
Statistical Release H.15(519) during the week following such day), or, if
such rate shall not be so reported on such day or such next preceding
Business Day, the average of the secondary market quotations for
three-month certificates of deposit of major money center banks in New York
City received at approximately 10:00 A.M., New York City time, on such day
(or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Administrative Agent from three New York City
negotiable certificate of deposit dealers of recognized standing selected
by it; and "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for the day of such
transactions received by the Administrative Agent from three federal funds
brokers of recognized standing selected by it. Any change in the ABR due
to a change in the Prime Rate, the Three-Month Secondary CD Rate or the
Federal Funds Effective Rate shall be effective as of the opening of
business on the effective day of such change in the Prime Rate, the
Three-Month Secondary CD Rate or the Federal Funds Effective Rate,
respectively.
"ABR LOANS": Loans the rate of interest applicable to which is based
upon the ABR.
"ACQUISITION": as defined in the recitals hereto.
"ADJUSTED EBITDA": as at the end of any fiscal quarter of the
Borrower, the average of the Consolidated EBITDA of the Borrower and its
Subsidiaries (a) for such fiscal quarter (on an annualized (I.E., times
four) and consolidated basis) and (b) for the preceding four fiscal
quarters, in each case after giving effect on a PRO FORMA basis to
Acquisitions completed during such fiscal period.
"ADJUSTMENT DATE": each date that is the second Business Day
following receipt by the Administrative Agent of the financial statements
required to be delivered pursuant to subsection 6.1.
"ADMINISTRATIVE AGENT": The Chase Manhattan Bank, together with its
affiliates, as the administrative agent for the Lenders under this
Agreement and the other Loan Documents.
"AFFILIATE": as to any Person, any other Person (other than a
Subsidiary or a Management Company) which, directly or indirectly, is in
control of, is controlled by, or is under common control with, such Person.
For purposes of this definition, "control" of a Person means the power,
directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power for the election of directors of such Person
or (b) direct or cause the direction of the management and policies of such
Person, whether by contract or otherwise.
"AGREEMENT": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
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3
"APPLICABLE MARGIN": with respect to Eurodollar Loans and ABR Loans,
the rate per annum, as adjusted on each Adjustment Date, set forth under
the headings "Applicable Margin for Eurodollar Loans" and "Applicable
Margin for ABR Loans," respectively, on ANNEX I hereto which corresponds to
the ratio of Senior Indebtedness to Adjusted EBITDA of the Borrower,
determined from the financial statements referred to in subsection 6.1 and
with respect to fiscal quarters ended prior to the date hereof, the
financial statements heretofore provided to the Administrative Agent;
PROVIDED that in the event that the financial statements required to be
delivered pursuant to subsection 6.1 are not delivered when due, then
(a) if such financial statements are delivered after the date required
(without giving effect to any applicable cure period) and the Applicable
Margin increases from that previously in effect as a result of the delivery
of such