e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
Or
[ ] |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-34457
Artio Global Investors Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-6174048 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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330 Madison Ave. |
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New York, NY
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10017 |
(Address of principal executive offices)
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(Zip Code) |
(212) 297-3600
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
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 is required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or
for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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x |
Non-accelerated filer
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o
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(Do not check if a smaller reporting company)
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Smaller reporting company
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o |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
As of April 30, 2011, there were 59,584,681 shares outstanding of the registrants Class A common
stock, par value $0.001 per share, Class B common stock, par value $0.001 per share and Class C
common stock, par value $0.01 per share.
Artio Global Investors Inc.
Table of Contents
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2 |
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3 |
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4 |
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6 |
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20 |
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32 |
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34 |
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34 |
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34 |
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35 |
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35 |
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35 |
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35 |
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35 |
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36 |
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1 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Financial Position
(Unaudited)
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As of |
(in thousands, except for share amounts) |
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March 31, 2011 |
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December 31, 2010 |
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ASSETS |
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Cash and cash equivalents |
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$ |
71,774 |
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$ |
80,043 |
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Investments, at fair value: |
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Artio Global funds held for deferred compensation and other investments |
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13,635 |
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10,405 |
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Investments owned by the Consolidated Investment Products |
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36,461 |
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24,642 |
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Fees receivable and accrued fees, net of allowance for doubtful accounts |
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51,940 |
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54,373 |
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Deferred taxes |
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196,153 |
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198,863 |
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Income taxes receivable |
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11,314 |
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8,586 |
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Other assets |
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13,686 |
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11,535 |
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Total assets |
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$ |
394,963 |
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$ |
388,447 |
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LIABILITIES AND EQUITY |
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Debt: |
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Term loan |
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$ |
51,000 |
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$ |
55,500 |
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Due to prime broker by the Consolidated Investment Products |
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5,405 |
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1,959 |
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Accrued compensation and benefits |
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12,697 |
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39,256 |
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Accounts payable and accrued expenses |
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6,228 |
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7,761 |
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Investments sold, not yet purchased by the Consolidated Investment
Products, at fair value |
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4,494 |
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1,288 |
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Accrued income taxes payable |
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14,118 |
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4,749 |
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Due under tax receivable agreement |
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162,092 |
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167,058 |
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Other liabilities |
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6,827 |
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4,593 |
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Total liabilities |
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262,861 |
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282,164 |
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Commitments and contingencies (Note 11) |
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Class A common stock (500,000,000 shares authorized, 2011 41,628,837
shares issued and outstanding; 2010 41,552,328 shares issued and
outstanding) |
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42 |
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42 |
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Class B common stock (50,000,000 shares authorized, 2011 and 2010 1,200,000 shares issued and outstanding) |
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1 |
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1 |
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Class C common stock (210,000,000 shares authorized, 2011 and 2010 16,755,844 shares issued and outstanding) |
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168 |
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168 |
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Additional paid-in capital |
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617,725 |
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613,065 |
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Accumulated deficit |
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(491,219 |
) |
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(509,629 |
) |
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Total stockholders equity |
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126,717 |
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103,647 |
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Non-controlling interests in Holdings |
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1,744 |
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1,505 |
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Non-controlling interests in the Consolidated Investment Products |
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3,641 |
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1,131 |
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Total equity |
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132,102 |
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106,283 |
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Total liabilities and equity |
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$ |
394,963 |
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$ |
388,447 |
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See accompanying notes to unaudited consolidated financial statements.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 2
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended March 31, |
(in thousands, except per share information) |
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2011 |
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2010 |
Revenues and other operating income: |
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Investment management fees |
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$ |
81,776 |
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$ |
85,287 |
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Net gains on funds held for deferred compensation |
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419 |
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321 |
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Foreign currency gains (losses) |
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(18 |
) |
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23 |
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Total revenues and other operating income |
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82,177 |
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85,631 |
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Expenses: |
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Employee compensation and benefits |
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28,018 |
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25,169 |
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Shareholder servicing and marketing |
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4,865 |
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4,548 |
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General and administrative |
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10,172 |
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10,285 |
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Total expenses |
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43,055 |
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40,002 |
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Operating income before income tax expense |
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39,122 |
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45,629 |
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Non-operating income (loss): |
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Interest income: |
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Investments of the Consolidated Investment Products |
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567 |
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Other investments |
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1 |
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Interest expense |
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(526 |
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(661 |
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Net gains (losses): |
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Investments of the Consolidated Investment Products |
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351 |
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Other investments |
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181 |
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(1 |
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Other income (loss) |
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(8 |
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Total non-operating income (loss) |
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565 |
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(661 |
) |
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Income before income tax expense |
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39,687 |
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44,968 |
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Income taxes |
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16,751 |
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14,767 |
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Net income |
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22,936 |
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30,201 |
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Net income attributable to non-controlling interests in Holdings |
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769 |
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11,333 |
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Net income attributable to non-controlling interests in the
Consolidated Investment Products |
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135 |
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Net income attributable to Artio Global Investors |
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$ |
22,032 |
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$ |
18,868 |
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Per share information: |
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Basic net income attributable to Artio Global Investors |
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$ |
0.38 |
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$ |
0.42 |
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Diluted net income attributable to Artio Global Investors |
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$ |
0.38 |
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$ |
0.42 |
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Weighted average shares used to calculate per share information: |
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Basic |
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58,354 |
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44,460 |
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Diluted |
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58,404 |
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44,629 |
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Dividends per basic share declared |
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$ |
0.06 |
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$ |
0.06 |
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See accompanying notes to unaudited consolidated financial statements.
3 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
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Non- |
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controlling |
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Interests in |
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Class A |
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Class B |
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Class C |
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the |
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Common |
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Common |
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Common |
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Non- |
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Consoli- |
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Stock |
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Stock |
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Stock |
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Additional |
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Retained |
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Stock- |
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controlling |
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dated |
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(in thousands, except |
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(par value |
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(par value |
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(par value |
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Paid-in |
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Earnings |
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holders |
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Interests in |
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Investment |
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Total |
per share information) |
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$0.001) |
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$0.001) |
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$0.01) |
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Capital |
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(Deficit) |
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Equity |
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Holdings |
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Products |
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Equity |
Balance as of
January 1, 2010 |
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$ |
28 |
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$ |
15 |
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$ |
168 |
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$ |
586,956 |
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$ |
(580,275 |
) |
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$ |
6,892 |
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$ |
(2,911 |
) |
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$ |
3,981 |
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Net income |
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18,868 |
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18,868 |
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11,333 |
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30,201 |
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Share-based payments: |
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Amortization |
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3,418 |
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3,418 |
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3,418 |
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Forfeiture |
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(13 |
) |
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(13 |
) |
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(13 |
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RSU dividend
equivalents |
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137 |
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(137 |
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Distribution to
non-controlling
interests |
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(936 |
) |
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(936 |
) |
Cash dividends paid
($0.06 per share) |
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(2,669 |
) |
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(2,669 |
) |
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(2,669 |
) |
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Balance as of
March 31, 2010 |
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$ |
28 |
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$ |
15 |
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$ |
168 |
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$ |
590,498 |
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$ |
(564,213 |
) |
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$ |
26,496 |
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$ |
7,486 |
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$ |
33,982 |
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Balance as of
January 1, 2011 |
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$ |
42 |
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$ |
1 |
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|
$ |
168 |
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|
$ |
613,065 |
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$ |
(509,629 |
) |
|
$ |
103,647 |
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|
$ |
1,505 |
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$ |
1,131 |
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|
$ |
106,283 |
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Net income |
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22,032 |
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22,032 |
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|
769 |
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135 |
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|
22,936 |
|
Share-based payments: |
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Directors awards |
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71 |
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71 |
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71 |
|
Amortization |
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4,470 |
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4,470 |
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|
4,470 |
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RSU dividend
equivalents |
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|
119 |
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(119 |
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Capital contributions
from non-controlling
interests |
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|
2,375 |
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|
2,375 |
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Distribution to
non-controlling
interests |
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(530 |
) |
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(530 |
) |
Cash dividends paid
($0.06 per share) |
|
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(3,503 |
) |
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(3,503 |
) |
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|
|
|
|
|
|
|
|
|
(3,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
March 31, 2011 |
|
$ |
42 |
|
|
$ |
1 |
|
|
$ |
168 |
|
|
$ |
617,725 |
|
|
$ |
(491,219 |
) |
|
$ |
126,717 |
|
|
$ |
1,744 |
|
|
$ |
3,641 |
|
|
$ |
132,102 |
|
|
See accompanying notes to unaudited consolidated financial statements.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 4
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands) |
|
2011 |
|
2010 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,936 |
|
|
$ |
30,201 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
629 |
|
|
|
676 |
|
Deferred compensation |
|
|
1,723 |
|
|
|
723 |
|
Share-based compensation |
|
|
4,541 |
|
|
|
3,405 |
|
Deferred income taxes |
|
|
2,710 |
|
|
|
(513 |
) |
Interest accrued on investments and accretion and amortization of discount
and premium |
|
|
(268 |
) |
|
|
|
|
Gains on investments |
|
|
(951 |
) |
|
|
(321 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Purchase of investments owned by the Consolidated Investment Products |
|
|
(30,279 |
) |
|
|
|
|
Proceeds from sales or maturities of investments owned by the Consolidated
Investment Products |
|
|
22,285 |
|
|
|
|
|
Due to prime broker by the Consolidated Investment Products |
|
|
3,446 |
|
|
|
|
|
Fees receivable and accrued fees, net of allowance for doubtful accounts |
|
|
2,433 |
|
|
|
1,847 |
|
Income taxes receivable |
|
|
(2,728 |
) |
|
|
(686 |
) |
Other assets |
|
|
(2,041 |
) |
|
|
(844 |
) |
Accrued compensation and benefits |
|
|
(28,282 |
) |
|
|
(21,305 |
) |
Accounts payable and accrued expenses |
|
|
(1,515 |
) |
|
|
(1,970 |
) |
Accrued income taxes payable |
|
|
9,369 |
|
|
|
6,989 |
|
Due under tax receivable agreement |
|
|
(4,966 |
) |
|
|
|
|
Other liabilities |
|
|
2,234 |
|
|
|
(338 |
) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,276 |
|
|
|
17,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of Artio Global funds held for deferred compensation and other
investments |
|
|
(7,700 |
) |
|
|
(3,608 |
) |
Proceeds from sales or maturities of Artio Global funds held for deferred
compensation and other investments |
|
|
5,070 |
|
|
|
3,585 |
|
Purchase of fixed assets |
|
|
(739 |
) |
|
|
(330 |
) |
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,369 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayments of borrowing under term credit facility |
|
|
(4,500 |
) |
|
|
|
|
Distributions paid to non-controlling interests in Holdings |
|
|
(530 |
) |
|
|
(936 |
) |
Contributions from non-controlling interests in the Consolidated Investment
Products |
|
|
2,375 |
|
|
|
|
|
Cash dividends paid |
|
|
(3,503 |
) |
|
|
(2,669 |
) |
|
|
|
|
|
Net cash used in financing activities |
|
|
(6,158 |
) |
|
|
(3,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
(18 |
) |
|
|
23 |
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(8,269 |
) |
|
|
13,929 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
80,043 |
|
|
|
60,842 |
|
|
|
|
|
|
End of period |
|
$ |
71,774 |
|
|
$ |
74,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for: |
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
7,412 |
|
|
$ |
9,138 |
|
Interest expense |
|
|
808 |
|
|
|
498 |
|
|
See accompanying notes to unaudited consolidated financial statements.
5 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
Artio Global Investors Inc. (Investors or the Company) and subsidiaries (collectively, we,
us or our) comprises Investors and its four subsidiaries, Artio Global Holdings LLC
(Holdings), an intermediate holding company, Artio Global Management LLC (Investment Adviser),
a registered investment adviser under the Investment Advisers Act of 1940, Artio Global
Institutional Services LLC (AGIS), and Artio Alpha Investment Funds, LLC (Alpha, the
consolidated investment vehicle that includes the Artio Global Credit Opportunities Fund). We refer
to the consolidated investment vehicles as the Consolidated Investment Products. As of March 31,
2011, Holdings was approximately 98% owned by Investors, 1% owned by Richard Pell, our Chairman,
Chief Executive Officer and Chief Investment Officer (Pell), and 1% owned by Rudolph-Riad Younes,
our Head of International Equity (Younes, together with Pell, the Principals). The Principals
interests are reflected in the consolidated financial statements as non-controlling interests.
Investment Adviser and Artio Global Institutional Services LLC are wholly owned subsidiaries of
Holdings. As of March 31, 2011, Alpha was 85% owned by Holdings as a result of a seed money
investment and the remaining 15% was owned by employees.
Investment Adviser is our primary operating entity and provides investment management services to
institutional and mutual fund clients. It manages and advises the Artio Global Funds (the Funds),
which are primarily U.S. registered investment companies; commingled institutional investment
vehicles; separate accounts; sub-advisory accounts; and the Consolidated Investment Products. A
substantial portion of our assets under management (AuM) are invested outside of the U.S. Our
clients are primarily U.S.-based.
The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). These principles require
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities (including contingent liabilities), revenues and expenses at the date of the
consolidated financial statements. Actual results could differ from those estimates and may have a
material effect on the consolidated financial statements.
Our interim consolidated financial statements are unaudited. Interim results reflect all normal
recurring adjustments that are, in the opinion of management, necessary for a fair presentation of
the results. Revenues and other operating income and Net income can vary significantly from quarter
to quarter due to the nature of our business activities. The financial results of interim periods
may not be indicative of the financial results for the entire year.
As part of the preparation of the interim consolidated financial statements, we performed an
evaluation of subsequent events occurring after the Consolidated Statement of Financial Position
date of March 31, 2011, through to the date the interim consolidated financial statements were
issued.
These statements should be read in conjunction with our consolidated financial statements and
related notes as of December 31, 2010, and for the three years then ended, included in our 2010
Annual Report on Form 10-K.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 6
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 2. Stockholders Equity
The table below sets forth the number of shares of Class A, Class B and Class C common stock issued
and outstanding as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
Class B |
|
Class C |
(in thousands) |
|
Common Stock |
|
Common Stock |
|
Common Stock |
As of December 31, 2009 |
|
|
27,659 |
|
|
|
15,600 |
|
|
|
16,756 |
|
Activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Exchange by the Principals(a) |
|
|
14,400 |
|
|
|
(14,400 |
) |
|
|
|
|
Shares issued to the public(b) |
|
|
4,209 |
|
|
|
|
|
|
|
|
|
Repurchase from the Principals(b) |
|
|
(4,209 |
) |
|
|
|
|
|
|
|
|
Share repurchase program(c) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
Restricted stock units vested |
|
|
485 |
|
|
|
|
|
|
|
|
|
Shares issued to the independent directors(d) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010(e) |
|
|
41,552 |
|
|
|
1,200 |
|
|
|
16,756 |
|
Restricted stock units vested |
|
|
72 |
|
|
|
|
|
|
|
|
|
Shares issued to independent directors(d) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011(e) |
|
|
41,629 |
|
|
|
1,200 |
|
|
|
16,756 |
|
|
|
|
|
(a) |
|
Represents the issuance of 7.2 million shares of Class A common stock to each of the
Principals upon exchange of an equivalent number of non-voting member interests in Holdings
(New Class A Units) in 2010. Upon the exchange of New Class A Units for Class A common
stock, corresponding shares of Class B common stock were canceled. |
|
(b) |
|
Represents the 4.2 million shares of Class A common stock that were issued to the public in
connection with a synthetic secondary offering (the secondary offering) in 2010, including
0.4 million shares issued to the underwriters in connection with exercising a portion of their
option to purchase additional shares of Class A common stock, and which were subsequently
repurchased and retired by us with the net proceeds. |
|
(c) |
|
In July 2010, our Board of Directors authorized a share repurchase program of up to 1.0
million shares of our common stock. As of December 31, 2010, we have purchased and retired 1.0
million shares of our common stock under this repurchase program. In December 2010, our Board
of Directors authorized a share repurchase program of up to 3.0 million shares of our common
stock, which will expire on December 31, 2013. As of March 31, 2011, we have not repurchased
any shares under this program. |
|
(d) |
|
Represents the 8,376 shares of fully-vested Class A common stock (subject to transfer
restrictions) that were awarded to our independent directors in 2010 and 4,520 shares of
fully-vested Class A common stock (subject to transfer restrictions) that were awarded to an
independent director in the first quarter of 2011. |
|
(e) |
|
The table does not reflect 1.9 million in 2010 and 4.3 million in the first quarter of 2011
of unvested restricted stock units (see Note 8. Share-Based Payments) awarded to certain
employees, each of which represents the right to receive one share of Class A common stock
upon vesting. |
Note 3. Consolidated Investment Products
From time to time, we may make investments in the investment vehicles we manage, primarily as seed
money. We evaluate these investment vehicles for consolidation. These investment vehicles are
consolidated if (i) they are variable interest entities (VIEs), and we are the primary
beneficiary, or (ii) they are voting interest entities, and we have a controlling interest. The net
gains and losses of these investment vehicles are included in Net income in the Consolidated
Statement of Operations.
We have a controlling financial interest in the Consolidated Investment Products, which are
therefore included in our consolidated financial statements. The assets and liabilities of the
Consolidated Investment Products are included in their respective
accounts in the Consolidated
Statement of Financial Position, and the results of operations are included in Non-operating income
(loss) in the Consolidated Statement of Operations.
7 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of financial position as of March 31, 2011, including balances
attributable to the Consolidated Investment Products, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global |
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
Investors Inc. and |
|
|
Before |
|
Investment |
|
|
|
|
|
Subsidiaries |
(in thousands) |
|
Consolidation (a) |
|
Products |
|
Eliminations |
|
Consolidated |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,020 |
|
|
$ |
754 |
|
|
$ |
|
|
|
$ |
71,774 |
|
Investments, at fair value |
|
|
13,635 |
|
|
|
36,461 |
|
|
|
|
|
|
|
50,096 |
|
Investment in the
Consolidated Investment
Products |
|
|
20,695 |
|
|
|
|
|
|
|
(20,695 |
) |
|
|
|
|
Other assets |
|
|
272,106 |
|
|
|
987 |
|
|
|
|
|
|
|
273,093 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
377,456 |
|
|
$ |
38,202 |
|
|
$ |
(20,695 |
) |
|
$ |
394,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
$ |
51,000 |
|
|
$ |
5,405 |
|
|
$ |
|
|
|
$ |
56,405 |
|
Investments sold, not yet
purchased by the
Consolidated Investment
Products, at fair value |
|
|
|
|
|
|
4,494 |
|
|
|
|
|
|
|
4,494 |
|
Other liabilities |
|
|
197,995 |
|
|
|
3,967 |
|
|
|
|
|
|
|
201,962 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
248,995 |
|
|
|
13,866 |
|
|
|
|
|
|
|
262,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
|
|
|
|
24,336 |
|
|
|
(24,336 |
) |
|
|
|
|
Common stock |
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
211 |
|
Additional paid-in capital |
|
|
617,725 |
|
|
|
|
|
|
|
|
|
|
|
617,725 |
|
Retained earnings (deficit) |
|
|
(491,219 |
) |
|
|
|
|
|
|
|
|
|
|
(491,219 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
126,717 |
|
|
|
24,336 |
|
|
|
(24,336 |
) |
|
|
126,717 |
|
Non-controlling interests |
|
|
1,744 |
|
|
|
|
|
|
|
3,641 |
|
|
|
5,385 |
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
128,461 |
|
|
|
24,336 |
|
|
|
(20,695 |
) |
|
|
132,102 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
377,456 |
|
|
$ |
38,202 |
|
|
$ |
(20,695 |
) |
|
$ |
394,963 |
|
|
|
|
|
(a) |
|
Represents Artio Global Investors Inc. and subsidiaries with the investment in the
Consolidated Investment Products accounted for under the equity method. |
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 8
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of financial position as of December 31, 2010, including
balances attributable to the Consolidated Investment Products, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global |
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
Investors Inc. and |
|
|
Before |
|
Investment |
|
|
|
|
|
Subsidiaries |
(in thousands) |
|
Consolidation (a) |
|
Products |
|
Eliminations |
|
Consolidated |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
79,232 |
|
|
$ |
811 |
|
|
$ |
|
|
|
$ |
80,043 |
|
Investments, at fair value |
|
|
10,405 |
|
|
|
24,642 |
|
|
|
|
|
|
|
35,047 |
|
Investment in the
Consolidated Investment
Products |
|
|
19,912 |
|
|
|
|
|
|
|
(19,912 |
) |
|
|
|
|
Other assets |
|
|
273,107 |
|
|
|
250 |
|
|
|
|
|
|
|
273,357 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
382,656 |
|
|
$ |
25,703 |
|
|
$ |
(19,912 |
) |
|
$ |
388,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
$ |
55,500 |
|
|
$ |
1,959 |
|
|
$ |
|
|
|
$ |
57,459 |
|
Investments sold, not yet
purchased by the
Consolidated Investment
Products, at fair value |
|
|
|
|
|
|
1,288 |
|
|
|
|
|
|
|
1,288 |
|
Other liabilities |
|
|
222,004 |
|
|
|
1,413 |
|
|
|
|
|
|
|
223,417 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
277,504 |
|
|
|
4,660 |
|
|
|
|
|
|
|
282,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
|
|
|
|
21,043 |
|
|
|
(21,043 |
) |
|
|
|
|
Common stock |
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
211 |
|
Additional paid-in capital |
|
|
613,065 |
|
|
|
|
|
|
|
|
|
|
|
613,065 |
|
Retained earnings (deficit) |
|
|
(509,629 |
) |
|
|
|
|
|
|
|
|
|
|
(509,629 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
103,647 |
|
|
|
21,043 |
|
|
|
(21,043 |
) |
|
|
103,647 |
|
Non-controlling interests |
|
|
1,505 |
|
|
|
|
|
|
|
1,131 |
|
|
|
2,636 |
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
105,152 |
|
|
|
21,043 |
|
|
|
(19,912 |
) |
|
|
106,283 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
382,656 |
|
|
$ |
25,703 |
|
|
$ |
(19,912 |
) |
|
$ |
388,447 |
|
|
|
|
|
(a) |
|
Represents Artio Global Investors Inc. and subsidiaries with the investment in the
Consolidated Investment Products accounted for under the equity method. |
9 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A condensed consolidating statement of operations for the three months ended March 31, 2011,
including amounts attributable to the Consolidated Investment Products, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global |
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
Investors Inc. and |
|
|
Before |
|
Investment |
|
|
|
|
|
Subsidiaries |
(in thousands) |
|
Consolidation (a) |
|
Products |
|
Eliminations |
|
Consolidated |
Total revenues and other operating income |
|
$ |
82,177 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
82,177 |
|
Total expenses |
|
|
43,055 |
|
|
|
|
|
|
|
|
|
|
|
43,055 |
|
|
|
|
|
|
|
|
|
|
Operating income before income tax expense |
|
|
39,122 |
|
|
|
|
|
|
|
|
|
|
|
39,122 |
|
Non-operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of the Consolidated
Investment Products |
|
|
783 |
|
|
|
|
|
|
|
(783 |
) |
|
|
|
|
Interest income |
|
|
|
|
|
|
567 |
|
|
|
|
|
|
|
567 |
|
Interest expense |
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
(526 |
) |
Net gains on investments |
|
|
181 |
|
|
|
351 |
|
|
|
|
|
|
|
532 |
|
Other income |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Total non operating income (loss) |
|
|
430 |
|
|
|
918 |
|
|
|
(783 |
) |
|
|
565 |
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
39,552 |
|
|
|
918 |
|
|
|
(783 |
) |
|
|
39,687 |
|
Income taxes |
|
|
16,751 |
|
|
|
|
|
|
|
|
|
|
|
16,751 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
22,801 |
|
|
|
918 |
|
|
|
(783 |
) |
|
|
22,936 |
|
Net income attributable to non-controlling
interests |
|
|
769 |
|
|
|
|
|
|
|
135 |
|
|
|
904 |
|
|
|
|
|
|
|
|
|
|
Net income, excluding non-controlling
interests |
|
$ |
22,032 |
|
|
$ |
918 |
|
|
$ |
(918 |
) |
|
$ |
22,032 |
|
|
|
|
|
(a) |
|
Represents Artio Global Investors Inc. and subsidiaries with the investment in the
Consolidated Investment Products accounted for under the equity method. |
We did not have amounts attributable to the Consolidated Investment Products for the three
months ended March 31, 2010.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 10
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 4. Related Party Activities
We engage in transactions with our mutual funds and with affiliates of our former parent, GAM
Holding AG (GAM), a Swiss corporation.
Affiliate Transactions Mutual and Offshore Funds
We earn management fees from the Funds, as Investment Adviser provides investment management
services to the Funds pursuant to investment management agreements with the Funds and makes
investment decisions for the Funds, which are subject to review and approval by their boards.
Investment Adviser also derives investment management revenue from sub-advising certain offshore
funds sponsored by affiliates of GAM. Revenues related to these services are included in Investment
management fees in the Consolidated Statement of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands) |
|
2011 |
|
2010 |
Funds investment management fees |
|
$ |
46,470 |
|
|
$ |
48,900 |
|
Sub-advisory investment management fees on GAM-sponsored funds |
|
|
641 |
|
|
|
592 |
|
|
Fees receivable related to investment management fees are included in Fees receivable and accrued
fees, net of allowance for doubtful accounts in the Consolidated Statement of Financial Position as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
(in thousands) |
|
2011 |
|
2010 |
Funds investment management fees |
|
$ |
15,546 |
|
|
$ |
15,850 |
|
Sub-advisory investment management fees on GAM-sponsored funds |
|
|
710 |
|
|
|
802 |
|
|
Tax Receivable Agreement
We have a tax receivable agreement that shares certain tax benefits with our Principals. Although
the payments under the tax receivable agreement are calculated based on annual tax savings, for the
three months ended March 31, 2011, the payments which would have been made pursuant to the tax
receivable agreement, if such period was calculated by itself, are estimated to be $1.9 million.
Other Related Party Transactions
Investors manages, at no cost to the plans, the assets of the non-contributory qualified defined
contribution retirement plan, which covers most employees, and the supplemental non-qualified
defined contribution plan sponsored by Investors.
11 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated
Investment Products, at Fair Value
Investments as of March 31, 2011, and December 31, 2010, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
(in thousands) |
|
2011 |
|
2010 |
Artio Global funds held for deferred compensation and other investments: |
|
|
|
|
|
|
|
|
Artio Global Funds |
|
$ |
12,113 |
|
|
$ |
9,069 |
|
Equity securities |
|
|
1,502 |
|
|
|
1,317 |
|
Other |
|
|
20 |
|
|
|
19 |
|
|
|
|
|
|
Total Artio Global funds held for deferred compensation and other investments |
|
$ |
13,635 |
|
|
$ |
10,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments owned by the Consolidated Investment Products: |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
3,854 |
|
|
$ |
3,142 |
|
Fixed income investments: |
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
25,420 |
|
|
|
17,075 |
|
Term loans |
|
|
6,974 |
|
|
|
4,425 |
|
Asset backed securities |
|
|
213 |
|
|
|
|
|
|
|
|
|
|
Total investments owned by the Consolidated Investment Products |
|
$ |
36,461 |
|
|
$ |
24,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments sold, not yet purchased by the Consolidated Investment Products: |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
(211 |
) |
|
$ |
(62 |
) |
Corporate bonds |
|
|
(4,283 |
) |
|
|
(1,226 |
) |
|
|
|
|
|
Total investments sold, not yet purchased by the Consolidated Investment Products |
|
$ |
(4,494 |
) |
|
$ |
(1,288 |
) |
|
Net gains (losses) for the three months ended March 31, 2011 and 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in thousands) |
|
2011 |
|
2010 |
Net gains on Artio Global funds held for deferred compensation |
|
$ |
419 |
|
|
$ |
321 |
|
Less: Net gains (losses) on Artio Global funds held for deferred compensation sold |
|
|
829 |
|
|
|
(50 |
) |
|
|
|
|
|
Unrealized gains (losses) on Artio Global funds held for deferred compensation |
|
$ |
(410 |
) |
|
$ |
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on investments of the Consolidated Investment Products |
|
$ |
351 |
|
|
|
|
|
Less: Net gains on investments of the Consolidated Investment Products sold |
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investments of the Consolidated Investment Products |
|
$ |
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on other investments |
|
$ |
181 |
|
|
$ |
(1 |
) |
Less: Net gains on other investments sold |
|
|
122 |
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on other investments |
|
$ |
59 |
|
|
$ |
(1 |
) |
|
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 12
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Consolidated Investment Products investment income, including income from derivative
contracts, is recorded in Non-operating income (loss): Net gains (losses): Investments of the
Consolidated Investment Products in the Consolidated Statement of Operations and is derived from
the following investment categories:
|
|
|
|
|
|
|
|
Three months |
|
|
ended |
(in thousands) |
|
March 31, 2011 |
Equity securities |
|
$ |
94 |
|
Fixed income investments: |
|
|
|
|
Corporate bonds |
|
|
405 |
|
Term loans |
|
|
23 |
|
Credit default swaps |
|
|
(148 |
) |
Foreign exchange forward contracts |
|
|
(20 |
) |
Options |
|
|
(1 |
) |
Other |
|
|
(2 |
) |
|
|
|
Total |
|
$ |
351 |
|
|
We carry our investments portfolio at fair value using a valuation hierarchy based on the
transparency of the inputs to the valuation techniques used to measure fair value. Classification
within the hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. The valuation hierarchy contains three levels: (i) valuation inputs comprising
unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1);
(ii) valuation inputs comprising quoted prices for identical assets or liabilities in markets that
are not active, quoted market prices for similar assets and liabilities in active markets, and
other observable inputs directly or indirectly related to the asset or liability being measured
(Level 2); and (iii) valuation inputs that are unobservable and are significant to the fair value
measurement (Level 3). Unobservable inputs are inputs that reflect our own assumptions about the
assumptions participants would use in pricing the asset or liability, developed based on the best
information available in the circumstances.
13 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Our investments as of March 31, 2011, and December 31, 2010, are valued using prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
Other |
|
Significant |
|
|
|
|
|
|
Level 1 |
|
Observable |
|
Unobservable |
(in thousands) |
|
Total |
|
Quoted Prices |
|
Inputs |
|
Inputs |
As of March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global funds held for deferred compensation and other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global Funds |
|
$ |
12,113 |
|
|
$ |
12,113 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
|
1,502 |
|
|
|
1,502 |
|
|
|
|
|
|
|
|
|
Other investments |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
Total Artio Global funds held for deferred compensation and other
investments |
|
$ |
13,635 |
|
|
$ |
13,615 |
|
|
$ |
|
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments owned by the Consolidated Investment Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
3,854 |
|
|
$ |
2,713 |
|
|
$ |
986 |
|
|
$ |
155 |
|
Fixed income investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
25,420 |
|
|
|
|
|
|
|
25,420 |
|
|
|
|
|
Term loans |
|
|
6,974 |
|
|
|
|
|
|
|
6,341 |
|
|
|
633 |
|
Asset-backed securities |
|
|
213 |
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments owned by the Consolidated Investment Products |
|
$ |
36,461 |
|
|
$ |
2,713 |
|
|
$ |
32,960 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments sold, not yet purchased by the Consolidated Investment
Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
(211 |
) |
|
$ |
(211 |
) |
|
$ |
|
|
|
$ |
|
|
Fixed income investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
(4,283 |
) |
|
|
|
|
|
|
(4,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments sold, not yet purchased by the Consolidated
Investment Products |
|
$ |
(4,494 |
) |
|
$ |
(211 |
) |
|
$ |
(4,283 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global funds held for deferred compensation and other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artio Global Funds |
|
$ |
9,069 |
|
|
$ |
9,069 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
|
1,317 |
|
|
|
1,317 |
|
|
|
|
|
|
|
|
|
Other investments |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
Total Artio Global funds held for deferred compensation and other
investments |
|
$ |
10,405 |
|
|
$ |
10,386 |
|
|
$ |
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments owned by the Consolidated Investment Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
3,142 |
|
|
$ |
2,367 |
|
|
$ |
629 |
|
|
$ |
146 |
|
Fixed income investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
17,075 |
|
|
|
|
|
|
|
17,075 |
|
|
|
|
|
Term loans |
|
|
4,425 |
|
|
|
|
|
|
|
3,470 |
|
|
|
955 |
|
|
|
|
|
|
|
|
|
|
Total investments owned by the Consolidated Investment Products |
|
$ |
24,642 |
|
|
$ |
2,367 |
|
|
$ |
21,174 |
|
|
$ |
1,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments sold, not yet purchased by the Consolidated Investment
Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
(62 |
) |
|
$ |
(62 |
) |
|
$ |
|
|
|
$ |
|
|
Fixed income investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
(1,226 |
) |
|
|
|
|
|
|
(1,226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments sold, not yet purchased by the Consolidated
Investment Products |
|
$ |
(1,288 |
) |
|
$ |
(62 |
) |
|
$ |
(1,226 |
) |
|
$ |
|
|
|
Derivative contracts, which are included in Other assets and
Other liabilities in the Consolidated
Statement of Financial Position, are valued using Level 2 inputs.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 14
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
There were no transfers between Level 1 and Level 2 securities.
Significant changes in Level 3 securities are as follows:
|
|
|
|
|
|
|
|
As of |
(in thousands) |
|
March 31, 2011 |
Equity investments owned by the Consolidated Investment Products: |
|
|
|
|
Beginning of period |
|
$ |
146 |
|
Net gains (losses) during the period |
|
|
9 |
|
|
|
|
End of period |
|
$ |
155 |
|
|
|
|
|
|
|
|
|
Equity investments total gains for the period attributable to the
change in unrealized gains or losses relating to assets still held
as of March 31, 2011 |
|
$ |
9 |
|
|
|
|
|
|
|
|
|
Term loan investments owned by the Consolidated Investment Products: |
|
|
|
|
Beginning of period |
|
$ |
955 |
|
Purchases |
|
|
571 |
|
Sales |
|
|
(758 |
) |
Transfers to level 2 |
|
|
(118 |
) |
Net gains (losses) during the period |
|
|
(17 |
) |
|
|
|
End of period |
|
$ |
633 |
|
|
|
|
|
|
|
|
|
Term loan investments total gains for the period attributable to
the change in unrealized gains or losses relating to assets still
held as of March 31, 2011 |
|
$ |
6 |
|
|
Unrealized gains are included in Non-operating income (loss): Net gains (losses): Investments of
the Consolidated Investment Products in the Consolidated Statement of Operations.
Note 6. Derivative Contracts
The Consolidated Investment Products employ credit default swaps and foreign exchange contracts as
part of their trading strategies and are accounted for as trading products.
|
|
|
|
|
|
|
|
|
|
|
|
Notional/Nominal Amount as of |
(in thousands) |
|
March 31, 2011 |
|
December 31, 2010 |
Credit default swaps |
|
$ |
5,700 |
|
|
$ |
5,200 |
|
Foreign exchange forward contracts |
|
|
9,156 |
|
|
|
2,582 |
|
Spot contracts |
|
|
413 |
|
|
|
|
|
Options |
|
|
10,500 |
|
|
|
|
|
|
During the three months ended March 31, 2011, we had an average notional amount outstanding of $8.5
million related to foreign exchange forward contracts and $5.0 million related to credit default
swaps.
15 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Fair value of derivative contracts as of March 31, 2011, and December 31, 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
Liabilities |
|
|
Statement of |
|
|
|
|
|
Statement of |
|
|
|
|
Financial |
|
|
|
|
|
Financial |
|
|
(in thousands) |
|
Position Location |
|
Fair Value |
|
Position Location |
|
Fair Value |
As of March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
Other assets |
|
$ |
3 |
|
|
Other liabilities |
|
$ |
95 |
|
Foreign exchange forward contracts |
|
Other liabilities |
|
|
1 |
|
|
Other liabilities |
|
|
5 |
|
Options |
|
Other assets |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
Other assets |
|
$ |
21 |
|
|
Other assets |
|
$ |
107 |
|
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
58 |
|
|
Please see Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the
Consolidated Investment Products, at Fair Value for income from derivative contracts that is
included in investment income by investment categories.
Note 7. Debt
Term Loan
In September 2009, Holdings entered into a $110.0 million credit facility consisting of a $60.0
million three-year term credit facility and a $50.0 million three-year revolving credit facility.
In January 2011, Holdings increased the capacity of its undrawn revolving credit facility from
$50.0 million to $100.0 million.
In October 2009, Holdings borrowed $60.0 million under the term credit facility. The interest rate
associated with the $60.0 million borrowing was 3.31% (LIBOR plus 300 basis points) as of March 31,
2011. The amortization schedule requires quarterly principal payments of $4.5 million in both years
two and three, which began on December 31, 2010, with a final payment of $24.0 million at maturity.
As of March 31, 2011, $51.0 million is outstanding under the term credit facility. Holdings has
made no borrowings under the revolving credit facility.
The covenants in the credit facility agreement require compliance with certain financial ratios. As
of March 31, 2011, Holdings was in compliance with all such debt covenants.
Due to Prime Broker
The Consolidated Investment Products employ leverage to finance its investments. Interest is
payable on such loans at the Fed Funds rate plus a range of 40 to 125 basis points. The loans are
collateralized by securities held by the Consolidated Investment Products.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 16
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 8. Share-Based Payments
Activity under the Artio Global Investors Inc. 2009 Stock Incentive Plan (the Plan) was as
follows:
|
|
|
|
|
|
|
|
Units/Shares |
Available for grant at inception |
|
|
9,700,000 |
|
Restricted stock units (RSUs) granted and unvested as of March 31, 2011 |
|
|
(2,233,970 |
) |
RSUs vested as of March 31, 2011 |
|
|
(552,044 |
) |
RSU dividend
equivalents unvested as of March 31, 2011 |
|
|
(34,913 |
) |
RSU dividend equivalents vested as of March 31, 2011 |
|
|
(5,098 |
) |
Fully-vested restricted stock granted to independent directors |
|
|
(27,539 |
) |
Long-term incentive program RSUs granted and unvested as of March 31, 2011 |
|
|
(2,042,467 |
) |
Long-term
incentive program RSU dividend equivalents unvested as of March 31, 2011 |
|
|
(7,932 |
) |
|
|
|
Available for grant as of March 31, 2011 |
|
|
4,796,037 |
|
|
Certain of the RSUs we have granted have service conditions, while other awards contain both a
service condition and either a performance or market condition.
Awards Having Only Service Conditions
A summary of RSU activity under the Plan for the three months ended March 31, 2011 and 2010,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
RSU Dividend |
|
|
Value(a) |
|
Number of RSUs |
|
Equivalents |
Granted and unvested as of December 31, 2010 |
|
|
|
|
|
|
1,856,997 |
|
|
|
27,225 |
|
Grants: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
$14.81 |
|
|
|
450,976 |
|
|
|
|
|
Dividend equivalents |
|
|
|
|
|
|
|
|
|
|
8,789 |
|
Vesting: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
23.58 |
|
|
|
(70,974 |
) |
|
|
|
|
Dividend equivalents |
|
|
|
|
|
|
|
|
|
|
(1,044 |
) |
Forfeitures: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
25.48 |
|
|
|
(3,029 |
) |
|
|
|
|
Dividend equivalents |
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
Granted and unvested as of March 31, 2011 |
|
|
|
|
|
|
2,233,970 |
|
|
|
34,913 |
|
|
|
|
|
|
|
|
|
|
|
Granted and unvested as of December 31, 2009 |
|
|
|
|
|
|
2,146,758 |
|
|
|
|
|
Grants: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
$23.58 |
|
|
|
215,398 |
|
|
|
|
|
Dividend equivalents |
|
|
|
|
|
|
|
|
|
|
5,704 |
|
Vesting: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
26.25 |
|
|
|
(74,500 |
) |
|
|
|
|
Forfeitures: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
26.25 |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted and unvested as of March 31, 2010 |
|
|
|
|
|
|
2,287,156 |
|
|
|
5,704 |
|
|
(a) |
|
Weighted-average grant date fair value for grants is based on the closing price on the
grant date. |
Compensation expense related to awards with only service conditions is recognized using a
straight-line method over the requisite service period (generally over a three- or five-year period
from the date of the grant for the entire award), unless an award meets retirement eligibility
requirements, if applicable. Compensation expense related to the amortization of RSU grants is
included in Employee compensation and benefits in the Consolidated Statement
17 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
of Operations and was
$3.5 million for the three months ended March 31, 2011, and $3.4 million for the three months ended
March 31, 2010.
Awards Having Additional Performance or Market Conditions
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
LTIP RSU Dividend |
|
|
LTIP RSUs |
|
Equivalents |
Granted and unvested as of December 31, 2010 |
|
|
|
|
|
|
|
|
Grants: |
|
|
|
|
|
|
|
|
Unvested long-term incentive program RSUs
granted to certain officers and employees |
|
|
2,042,467 |
|
|
|
|
|
Dividend equivalents |
|
|
|
|
|
|
7,932 |
|
|
|
|
|
|
Granted and unvested as of March 31, 2011 |
|
|
2,042,467 |
|
|
|
7,932 |
|
|
During the three months ended March 31, 2011, we adopted a long-term incentive program (the
LTIP). Awards issued pursuant to the LTIP were in the form of RSUs and within the overall Plan.
Awards granted under the LTIP contain either a performance- or market-based condition in addition
to a service requirement. The conditions of the performance-based awards correspond with the
responsibilities of the individual recipient and are either linked to investment performance or
sales targets, while the conditions associated with the market-based awards relate to increasing
the price/earnings multiple of our Class A common stock as compared to our peer group. The awards
have 3-year cliff vesting to the extent the performance or market conditions are achieved. The fair
value of the awards with performance conditions is based on the expected outcome of the performance
target and is amortized over the 3-year service period. In some cases, the performance targets may
be set on an annual basis and communicated to the employee after the initial grant date. In such
cases, the amortization period begins when the performance targets are set and communicated. The
assumptions used by management to derive the fair value of the
performance-based awards will be
reviewed on a quarterly basis. Any changes to the fair value of such awards will be reflected
within compensation expense. The fair value of the awards with market conditions was determined at
grant date and is being amortized over the 3-year service period. As the awards contain
market-based conditions, the entire expense will be recognized unless the service condition is not
met.
Compensation expense related to the LTIP RSU grants is included in Employee compensation and
benefits in the Consolidated Statement of Operations and was $1.0 million for the three months
ended March 31, 2011. There was no LTIP during the three months ended March 31, 2010.
Note 9. Income Taxes
A summary of the provisions for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands) |
|
2011 |
|
2010 |
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
10,746 |
|
|
$ |
10,713 |
|
State and local |
|
|
3,295 |
|
|
|
4,567 |
|
|
|
|
|
|
Total |
|
|
14,041 |
|
|
|
15,280 |
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
1,672 |
|
|
|
(368 |
) |
State and local |
|
|
1,038 |
|
|
|
(145 |
) |
|
|
|
|
|
Total |
|
|
2,710 |
|
|
|
(513 |
) |
|
|
|
|
|
Income tax expense |
|
$ |
16,751 |
|
|
$ |
14,767 |
|
|
Tax years 2007 to the present are open for examination by Federal, state and local tax authorities.
We are currently under examination by New York State tax authorities for the years 2006 through
2008 and by New York City tax authorities for Investment Adviser for the years 2006 and 2007. There
are waivers to extend our 2006 New York State and New York City tax years to September 2011.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 18
ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A
reconciliation between the Federal statutory tax rate of 35% and the
effective tax rates is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in percentages) |
|
2011 |
|
2010 |
Federal statutory rate |
|
|
35 |
% |
|
|
35 |
% |
State and local, net of Federal benefit, and other |
|
|
6 |
|
|
|
9 |
|
Non-controlling interests |
|
|
(1 |
) |
|
|
(11 |
) |
Permanent differences: |
|
|
|
|
|
|
|
|
Other |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
42 |
% |
|
|
33 |
% |
|
Note 10. Earnings Per Share (EPS)
Basic and diluted EPS from continuing operations were calculated using the following:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands) |
|
2011 |
|
2010 |
Net income attributable to Artio Global Investors Basic |
|
$ |
22,032 |
|
|
$ |
18,868 |
|
|
|
|
|
|
Net income attributable to non-controlling interests(a) |
|
|
|
|
|
|
|
|
Income tax related to non-controlling interests(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Diluted |
|
$ |
22,032 |
|
|
$ |
18,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic EPS |
|
|
58,354 |
|
|
|
44,460 |
|
Dilutive potential shares from exchange of New Class A Units by the Principals(a) |
|
|
|
|
|
|
|
|
Dilutive potential shares from grants of RSUs(b) |
|
|
50 |
|
|
|
169 |
|
|
|
|
|
|
Weighted average shares for diluted EPS |
|
|
58,404 |
|
|
|
44,629 |
|
|
|
|
|
(a) |
|
The potential impact of the exchange of New Class A Units by the Principals, and
cancelation of corresponding shares of Class B common stock, for Class A common stock of 1.2
million weighted average shares for the three months ended March 31, 2011, and 15.6 million
weighted average shares for the three months ended March 31, 2010, was antidilutive. |
|
(b) |
|
The potential impact of an additional 2.1 million granted RSUs for the three months ended
March 31, 2011, and an additional 1.7 million granted RSUs for the three months ended March
31, 2010, was antidilutive. |
On April 25, 2011, our Board of Directors declared a dividend of $0.06 per share to be paid on
May 25, 2011, to holders of record of our Class A and Class C common stock at the close of business
on May 11, 2011. To provide funding for the dividend payable to the holders of record of our Class
A and Class C common stock, a distribution by Holdings of $0.06 per New Class A Unit will be paid
to all members of Holdings, including the Principals.
Note 11. Commitments and Contingencies
There are no claims against us that are considered probable or reasonably possible of having a
material effect on our cash flows, results of operations or financial position.
Although we may not have an explicit legal obligation to do so, we have, at our discretion,
reimbursed client accounts for certain operational losses incurred.
Note 12. Subsequent Events
In April 2011, AGIS was licensed as a broker-dealer. Certain distribution activities currently
conducted by Investment Adviser will henceforth be conducted by AGIS.
19 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Introduction
Artio Global Investors Inc. (Investors or the Company) and subsidiaries (collectively, we,
us or our) comprises Investors and its four subsidiaries, Artio Global Holdings LLC
(Holdings), an intermediate holding company, Artio Global Management LLC (Investment Adviser),
a registered investment adviser under the Investment Advisers Act of 1940, Artio Global
Institutional Services LLC (formerly known as Artio Capital Management LLC) and Artio Alpha
Investment Funds, LLC (Alpha, the consolidated investment vehicle that includes the Artio Global
Credit Opportunities Fund). We refer to the consolidated investment vehicles as the Consolidated
Investment Products. As of March 31, 2011, Holdings was approximately 98% owned by Investors, 1%
owned by Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer (Pell),
and 1% owned by Rudolph-Riad Younes, our Head of International Equity (Younes, together with
Pell, the Principals). The Principals interests are reflected in the Consolidated Financial
Statements as non-controlling interests. Investment Adviser and Artio Global Institutional Services
LLC are wholly owned subsidiaries of Holdings. As of March 31, 2011, Alpha was 85% owned by
Holdings as a result of a seed money investment and the remaining 15% was owned by employees.
Our MD&A is provided in addition to the accompanying consolidated financial statements and
footnotes to assist readers in understanding our results of operations and liquidity and capital
resources. The MD&A is organized as follows:
|
|
General Overview. Beginning on page 21, we provide a summary of our overall business and
the economic environment. |
|
|
Key Performance Indicators. Beginning on page 22, we discuss some of the operating and
financial indicators that guide managements review of our performance. |
|
|
Assets Under Management. Beginning on page 24, we provide a detailed discussion of our
assets under management (AuM), which is a major driver of our operating revenues and key
performance indicators. |
|
|
Revenues and Other Operating Income. Beginning on page 28, we compare our revenue and other
operating income to the corresponding period a year ago. |
|
|
Operating Expenses. Beginning on page 29, we compare our operating expenses to the
corresponding period a year ago. |
|
|
Non-operating Income (Loss). Beginning on page 29, we compare our non-operating income
(loss) to the corresponding period a year ago. |
|
|
Income Taxes. Beginning on page 30, we compare our effective tax rates to the corresponding
period a year ago. |
|
|
Liquidity and Capital Resources. Beginning on page 30, we discuss our working capital as of
March 31, 2011, and December 31, 2010, and cash flows for the first three months of 2011 and
2010. Also included is a discussion of the amount of financial capacity available to help fund
our future activities. |
|
|
Cautionary Note Regarding Forward-Looking Statements. Beginning on page 32, we describe the
risks and uncertainties that could cause actual results to differ materially from those
discussed in forward-looking statements set forth in this Form 10-Q relating to our financial
results, operations, business plans and prospects. Such forward-looking statements are based
on managements current expectations about future events, which are inherently susceptible to
uncertainty and changes in circumstances. |
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 20
General Overview
Business
We are an asset management company that provides investment management services to institutional
and mutual fund clients. We manage and advise proprietary funds; commingled institutional
investment vehicles; institutional separate accounts; sub-advisory accounts; and the Consolidated
Investment Products. While our operations are based principally in the U.S. and our clients are
primarily U.S.-based, a substantial portion of our AuM are invested outside of the U.S.
Historically, our distribution activities have been primarily focused within North America. During
the first quarter of 2011, we opened an office in London, England, to expand our distribution
activities to Europe and the Middle East. Our revenues are primarily billed in U.S. dollars and are
calculated based on the U.S. dollar value of the investment assets we manage for clients, which can
fluctuate with changes in foreign currency exchange rates. As of March 31, 2011, 76% of our AuM
were exposed to currencies other than the U.S. dollar. Consequently, changes in foreign currency exchange
rates may have a material impact on our revenues. Our expenses are primarily billed and paid in
U.S. dollars and not significantly impacted by foreign currency
exchange rates, although certain of our
shareholder servicing expenses are driven by the average daily market value of proprietary fund AuM
and therefore, indirectly impacted by foreign currency exchange rates.
Economic Environment
As an investment manager, we derive substantially all of our operating revenues from providing
investment management services to our institutional and mutual fund clients. Such revenues are
driven by the amount and composition of our AuM, as well as by our fee structure, making our
business results sensitive to the prevailing global economic climate and its impact on investor
sentiment and capital markets.
The first quarter of 2011 was a period marked by significant global events. Protest movements and
uprisings in the Middle East and North Africa were initially ignited by the revolt in Tunisia. This
unrest spread to Egypt with protests leading to the resignation of that nations President and the
announcement of a new interim constitution. Elsewhere in the region, fighting in Libya,
anti-government demonstrations in Bahrain, Yemen and Syria continues to unfold. The quarter also
witnessed the devastating effects of the Japanese earthquake and tsunami and the ongoing crisis
with the countrys nuclear reactors.
Against these world events, financial markets were resilient. With few exceptions, equity markets
posted positive returns, with developed markets outpacing emerging markets. Japanese equities
posted negative returns for the quarter, but did regain part of the lost ground by quarters end.
Despite ongoing sovereign debt worries, Europe, across both developed and emerging markets
outperformed the rest of the world. The euro was off to a solid start to the year, advancing by
approximately 5.8% versus the U.S. dollar, providing added benefit to U.S. dollar-based investors
holding euro-denominated investments. Near the end of the quarter, Europes parliament approved the
formation of a permanent European Stability Mechanism (ESM) which goes into effect in mid-2013.
This ESM will make loans to fiscally strained governments under strict conditions. This was met
with a second downgrade to Portugal in March by Standard & Poors, who cited fears that the country
may have to restructure its debt and force bond holders to accept losses after 2013. Greece was
also pushed lower into junk status by the rating agency. At the end of the quarter, Ireland agreed
to inject up to 24 billion euros into four of its banks, serving as a reminder that the sovereign
debt crisis is far from over. Elsewhere, emerging Asian markets exhibited lackluster returns driven
primarily by declines in India, Taiwan and the Philippines. However, from a low in February, India
managed to recover a large portion of its declines at the end of March. Concerns over mounting
inflationary pressures within the Asia region, met with interest rate hikes in China and India,
depressed returns for most of the quarter. Within fixed income markets, global high yield products
exceeded their investment grade counterparts, although the pace of outperformance began to slow in
March.
21 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
Key Performance Indicators
Our management reviews our performance on a monthly basis, focusing on the indicators described
below.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in millions, except basis points, percentages and per share amounts) |
|
2011 |
|
2010 |
Operating indicators |
|
|
|
|
|
|
|
|
AuM at end of period |
|
$ |
51,328 |
|
|
$ |
56,417 |
|
Average AuM for period(a) |
|
|
52,659 |
|
|
|
54,711 |
|
Net client cash flows |
|
|
(3,230 |
) |
|
|
95 |
|
|
|
|
|
|
|
|
|
|
Financial indicators |
|
|
|
|
|
|
|
|
Investment management fees |
|
|
82 |
|
|
|
85 |
|
Effective fee rate (basis points)(b) |
|
|
63.0 |
|
|
|
63.2 |
|
Adjusted operating income(c) |
|
|
42 |
|
|
|
49 |
|
Adjusted operating margin(d) |
|
|
50.8 |
% |
|
|
57.0 |
% |
EBITDA(c) |
|
|
44 |
|
|
|
50 |
|
EBITDA margin(d) |
|
|
53.8 |
% |
|
|
58.1 |
% |
Adjusted compensation ratio(c)(e) |
|
|
30.9 |
% |
|
|
25.7 |
% |
Adjusted net income attributable to Artio Global Investors(c) |
|
|
24 |
|
|
|
27 |
|
Diluted earnings per share |
|
$ |
0.38 |
|
|
$ |
0.42 |
|
Adjusted diluted earnings per share(f) |
|
$ |
0.41 |
|
|
$ |
0.46 |
|
|
|
|
|
(a) |
|
Average AuM for a period is computed on the beginning-of-first-month balance and all
end-of-month balances within the period. |
|
(b) |
|
The effective fee rate is computed by dividing annualized investment management fees
(normalized for the number of days in the period) by average AuM for the period. |
|
(c) |
|
See the Adjusted Performance Measures section of this MD&A for reconciliations of Employee
compensation and benefits to Adjusted compensation; Operating income before income tax expense
to Adjusted operating income; Net income attributable to Artio Global Investors to Adjusted
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA); and Net income
attributable to Artio Global Investors to Adjusted net income attributable to Artio Global
Investors. |
|
(d) |
|
Adjusted operating and EBITDA margins are calculated by dividing Adjusted operating income
and EBITDA by Total revenues and other operating income. |
|
(e) |
|
Calculated as Adjusted compensation(c) divided by Total revenues and other
operating income. |
|
(f) |
|
Adjusted diluted earnings per share is calculated by dividing Adjusted net income
attributable to Artio Global Investors by Adjusted weighted average diluted shares (see the
Adjusted Performance Measures section of this MD&A). |
Operating Indicators
Our revenues are driven by the amount and composition of our AuM, as well as by our fee structure.
As a result, management closely monitors our AuM. We believe average AuM is important as most of
our fees are calculated based on daily or monthly AuM, rather than quarter-end balances of AuM.
Net client cash flows represent sales either to new clients or existing clients, less redemptions.
Our net client cash flows are driven primarily by the performance of our investment strategies
relative to their respective benchmark and/or peers, absolute levels of performance,
competitiveness of our fee rates, the success of our marketing and client service efforts, and the
state of the overall equity and fixed income markets. In addition, our net client cash flows
reflect client-specific actions, such as portfolio rebalancing or decisions to change investment
portfolio managers. Our net client cash outflows of $3.2 billion in the three months ended March
31, 2011, include gross client cash outflows of $5.5 billion that in our view reflect a variety of
contributing factors, including underperformance in our International Equity strategies, client
rebalancing decisions, asset reallocations, and clients adopting a different investment approach.
As of March 31, 2011, AuM of $51.3 billion had decreased 9% from March 31, 2010, as market
appreciation was more than offset by net client cash outflows.
Industry commentators have recently identified several industry trends that may affect our client
cash flows in the future, including: growing interest from U.S. institutions in cross-border
investing across asset classes; growing
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 22
interest in passive equity investments; and a move by
certain corporate pension plans towards a liability-driven investment approach.
Appetite for cross-border investing across asset classes is constructive for many of our investment
strategies, in particular, interest from U.S. institutions in global equity as an asset class. In
light of a general move away from home-country bias, a gradual increase in risk appetite in line
with a global economic recovery and the potential for continued weakness in the U.S. dollar, we
expect increased interest in cross-border investing to continue. While we believe there remains a
strong case for active investment management across many asset classes, sustained growth in the
market share of passive investments is viewed as unfavorable for active managers, such as us, as
would a sustained move towards a liability-driven investment approach. The extent to which our
strategies participate in activity resulting from these trends will depend upon a number of
factors, including investment performance.
While the strength of financial markets seen in second half of 2010 continued into the first
quarter of 2011, renewed concerns over sovereign debt within the eurozone and the sustainability of
the global economic recovery may continue to support a cautious stance by investors, impacting the
level of equity search activity in 2011. In addition, underperformance in our International Equity
strategies may continue to negatively impact our net client cash flows.
Financial Indicators
Management reviews certain financial ratios to monitor progress with internal forecasts, monitor
our business drivers and compare our firm with others in the asset management industry. The
effective fee rate represents the amount of investment management fees we earn divided by the
average dollar value of client assets we manage. We use this information to evaluate the
contribution to revenue of our products. Adjusted operating and EBITDA margins are important
indicators of our profitability and the efficiency of our business model. (See the Adjusted
Performance Measures section of this MD&A for a discussion of financial indicators not prepared in
conformity with U.S. Generally Accepted Accounting Principles (GAAP).) Other ratios shown in the
table above allow us to review expenses in comparison with our revenues.
Our effective fee rate of 63.0 basis points for the three months ended March 31, 2011, decreased
slightly compared to the corresponding period in 2010.
Our Adjusted operating income and EBITDA margins in the three months ended March 31, 2011,
decreased compared to the corresponding period in 2010, as expenses increased while revenue
decreased. Although the economic events since the latter part of 2008 severely impacted our
business in the last few years, we continued to generate strong Adjusted operating income and
EBITDA margins, which we believe reflects the strength of our franchise and the variability of a
portion of our expense base.
Adjusted Performance Measures
Certain of our financial indicators are adjusted versions of balances in our consolidated financial
statements and are not prepared in conformity with GAAP. We believe these adjusted financial
indicators are meaningful as they are more representative of our ongoing organizational structure.
We exclude the amortization expense associated with equity awards granted to employees at the time
of our initial public offering (IPO) in 2009. We have adjusted Income taxes to reflect the
appropriate effective tax rate for each period after taking into consideration this non-GAAP
adjustment. We also present Adjusted net income attributable to Artio Global Investors per diluted
share, which assumes the full exchange of our Principals non-controlling interests for Class A
common stock at the beginning of each period presented. These adjustments are reflected in Adjusted
operating income, Adjusted operating margin, EBITDA, EBITDA margin, Adjusted compensation ratio,
Adjusted net income attributable to Artio Global Investors and Adjusted diluted earnings per share.
23 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
The following table provides reconciliations of Employee compensation and benefits to Adjusted
compensation, Operating income before income tax expense to Adjusted operating income, Net income
attributable to Artio Global Investors to EBITDA, and Net income attributable to Artio Global
Investors to Adjusted net income attributable to Artio Global Investors.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in millions) |
|
2011 |
|
2010 |
Employee compensation and benefits |
|
$ |
28 |
|
|
$ |
25 |
|
Less compensation adjustments: |
|
|
|
|
|
|
|
|
Amortization expense of IPO-related restricted stock unit grants |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Total compensation adjustments |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Adjusted compensation |
|
$ |
25 |
|
|
$ |
22 |
|
|
|
|
|
|
|
Operating income before income tax expense |
|
$ |
39 |
|
|
$ |
46 |
|
Add: total compensation adjustments |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Adjusted operating income |
|
$ |
42 |
|
|
$ |
49 |
|
|
|
|
|
|
|
Net income attributable to Artio Global Investors |
|
$ |
22 |
|
|
$ |
19 |
|
Add: net income attributable to non-controlling interests |
|
|
|
|
|
|
11 |
|
Add: income taxes |
|
|
17 |
|
|
|
15 |
|
Add: amortization of share-based compensation |
|
|
4 |
|
|
|
3 |
|
Add: interest expense, net |
|
|
|
|
|
|
1 |
|
Add: depreciation and amortization |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
EBITDA |
|
$ |
44 |
|
|
$ |
50 |
|
|
|
|
|
|
|
Net income attributable to Artio Global Investors |
|
$ |
22 |
|
|
$ |
19 |
|
Add: net income attributable to non-controlling interests |
|
|
|
|
|
|
11 |
|
Add: total compensation adjustments |
|
|
3 |
|
|
|
3 |
|
Tax impact of adjustments |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
|
|
Adjusted net income attributable to Artio Global Investors |
|
$ |
24 |
|
|
$ |
27 |
|
|
|
|
|
|
|
Weighted average diluted shares |
|
|
58 |
|
|
|
45 |
|
Adjusted weighted average diluted shares(a) |
|
|
60 |
|
|
|
60 |
|
|
|
|
|
(a) |
|
Adjusted weighted average diluted shares assumes that the Principals had exchanged all of
their non-voting Class A member interests in Holdings (New Class A Units) for Class A common
stock. |
Assets under Management (AuM)
Changes to our AuM, the distribution of our AuM among our investment products and investment
strategies, and the effective fee rates on our products, all affect our operating results from one
period to another.
The amount and composition of our AuM are, and will continue to be, influenced by a variety of
factors including, among other things:
|
|
investment performance, including our investment decisions and fluctuations in both the
financial markets and foreign currency exchange rates; |
|
|
|
client cash flows into and out of our investment products; |
|
|
|
the mix of AuM among our various strategies; and |
|
|
|
our introduction or closure of investment strategies and products. |
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 24
Our core investment strategies are:
|
|
International Equity; |
|
|
|
Global Equity; |
|
|
|
U.S. Equity; |
|
|
|
High Grade Fixed Income; and |
|
|
|
High Yield. |
Investors have invested in our strategies through the investment vehicles set forth in the
following table.
The following table sets forth a summary of our AuM by investment vehicle type as of March 31, 2011
and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
As a % of AuM as of March 31, |
(in millions, except percentages) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Funds(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A shares |
|
$ |
7,073 |
|
|
$ |
7,851 |
|
|
|
|
|
|
|
|
|
I shares(b) |
|
|
15,781 |
|
|
|
16,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22,854 |
|
|
|
24,751 |
|
|
|
44.5 |
% |
|
|
43.9 |
% |
Institutional commingled funds |
|
|
9,374 |
|
|
|
9,256 |
|
|
|
18.3 |
|
|
|
16.4 |
|
Separate accounts |
|
|
14,768 |
|
|
|
17,786 |
|
|
|
28.8 |
|
|
|
31.5 |
|
Sub-advisory accounts |
|
|
4,332 |
|
|
|
4,624 |
|
|
|
8.4 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
$ |
51,328 |
|
|
$ |
56,417 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
(a) |
|
Proprietary Funds include both SEC-registered funds and private offshore funds.
SEC-registered mutual funds within our proprietary funds are: Artio International Equity Fund;
Artio International Equity Fund II; Artio Total Return Bond Fund; Artio Global High Income
Fund; Artio Global Equity Fund Inc.; Artio U.S. Microcap Fund; Artio U.S. Midcap Fund; Artio
U.S. Multicap Fund; and Artio U.S. Smallcap Fund. |
|
(b) |
|
Amounts invested in private offshore funds are categorized as I shares. |
The different fee structures associated with each type of investment vehicle make the
composition of our AuM an important determinant of the investment management fees we earn. We
typically earn higher effective investment management fee rates from our proprietary funds and
institutional commingled funds as compared to our separate and sub-advised accounts.
25 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
The following table sets forth the changes in AuM by investment vehicle type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in millions, except percentages) |
|
2011 |
|
2010 |
|
% Change |
Proprietary Funds: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning AuM |
|
$ |
23,013 |
|
|
$ |
24,482 |
|
|
|
(6 |
)% |
Gross client cash inflows |
|
|
1,788 |
|
|
|
2,021 |
|
|
|
(12 |
) |
Gross client cash outflows |
|
|
(2,473 |
) |
|
|
(1,995 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
Net client cash flows |
|
|
(685 |
) |
|
|
26 |
|
|
|
* |
|
Transfers between investment vehicles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total client cash flows |
|
|
(685 |
) |
|
|
26 |
|
|
|
* |
|
Market appreciation |
|
|
526 |
|
|
|
243 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
|
22,854 |
|
|
|
24,751 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Institutional Commingled Funds: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning AuM |
|
|
9,236 |
|
|
|
9,198 |
|
|
|
|
|
Gross client cash inflows |
|
|
153 |
|
|
|
302 |
|
|
|
(49 |
) |
Gross client cash outflows |
|
|
(424 |
) |
|
|
(262 |
) |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
Net client cash flows |
|
|
(271 |
) |
|
|
40 |
|
|
|
* |
|
Transfers between investment vehicles |
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total client cash flows |
|
|
(61 |
) |
|
|
40 |
|
|
|
* |
|
Market appreciation |
|
|
199 |
|
|
|
18 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
|
9,374 |
|
|
|
9,256 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Separate Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning AuM |
|
|
16,801 |
|
|
|
17,854 |
|
|
|
(6 |
) |
Gross client cash inflows |
|
|
135 |
|
|
|
418 |
|
|
|
(68 |
) |
Gross client cash outflows |
|
|
(2,240 |
) |
|
|
(567 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Net client cash flows |
|
|
(2,105 |
) |
|
|
(149 |
) |
|
|
* |
|
Transfers between investment vehicles |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total client cash flows |
|
|
(2,315 |
) |
|
|
(149 |
) |
|
|
* |
|
Market appreciation |
|
|
282 |
|
|
|
81 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
|
14,768 |
|
|
|
17,786 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
Sub-advisory Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning AuM |
|
|
4,357 |
|
|
|
4,459 |
|
|
|
(2 |
) |
Gross client cash inflows |
|
|
151 |
|
|
|
313 |
|
|
|
(52 |
) |
Gross client cash outflows |
|
|
(320 |
) |
|
|
(135 |
) |
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
Net client cash flows |
|
|
(169 |
) |
|
|
178 |
|
|
|
(195 |
) |
Transfers between investment vehicles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total client cash flows |
|
|
(169 |
) |
|
|
178 |
|
|
|
(195 |
) |
Market appreciation (depreciation) |
|
|
144 |
|
|
|
(13 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
|
4,332 |
|
|
|
4,624 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Total AuM: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning AuM |
|
|
53,407 |
|
|
|
55,993 |
|
|
|
(5 |
) |
Gross client cash inflows |
|
|
2,227 |
|
|
|
3,054 |
|
|
|
(27 |
) |
Gross client cash outflows |
|
|
(5,457 |
) |
|
|
(2,959 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
Net client cash flows |
|
|
(3,230 |
) |
|
|
95 |
|
|
|
* |
|
Transfers between investment vehicles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total client cash flows |
|
|
(3,230 |
) |
|
|
95 |
|
|
|
* |
|
Market appreciation |
|
|
1,151 |
|
|
|
329 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ending AuM |
|
$ |
51,328 |
|
|
$ |
56,417 |
|
|
|
(9 |
) |
|
|
|
|
*Calculation not meaningful. |
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 26
Net client cash flows across all investment vehicles decreased $3.3 billion during the three
months ended March 31, 2011, compared to the corresponding period in 2010, mainly as a result of:
|
|
a $1.3 billion increase in our International Equity II strategys net client cash outflows; |
|
|
|
a $1.1 billion increase in our International Equity I strategys net client cash outflows; |
|
|
|
a $0.8 billion decrease in our High Yield strategys net client cash inflows; and |
|
|
|
a $0.3 billion decrease in our Global Equity strategys net client cash inflows. |
Market appreciation for the three months ended March 31, 2011, compared to the corresponding period
in 2010, was primarily attributable to the following strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in millions, except percentages) |
|
2011 |
|
2010 |
|
% Change |
Market appreciation (depreciation): |
|
|
|
|
|
|
|
|
|
|
|
|
International Equity I |
|
$ |
347 |
|
|
$ |
60 |
|
|
|
* |
% |
International Equity II |
|
|
451 |
|
|
|
(12 |
) |
|
|
* |
|
Other strategies |
|
|
353 |
|
|
|
281 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market appreciation |
|
$ |
1,151 |
|
|
$ |
329 |
|
|
|
* |
|
|
*Calculation not meaningful.
The MSCI AC World ex USA Index increased 3.4% during the three months ended March 31, 2011,
and increased by 1.6% during the three months ended March 31, 2010. In the three months ended March
31, 2011, the gross performances of our International Equity I and International Equity II
strategies each trailed the index by 1.2%. In the three months ended March 31, 2010, the gross
performances of our International Equity I strategy trailed the index by 1.0% and our International
Equity II strategy trailed the index by 1.5%.
Absolute returns for our International Equity strategies and the index were positive for the first
quarter of 2011, as the major international indices moved higher with the exception of Japan. The
euro staged a solid recovery and contributed to Europes strong
showing in U.S. dollar terms. The
returns of our International Equity strategies trailed the index for the full quarter, but relative
underperformance was narrowed in the month of March as the strategies outperformed. Returns for
the quarter were negatively impacted by stock selection decisions in developed markets, primarily
within the financial and consumer discretionary sectors, and to a lesser extent, sector allocation
within developed markets, mainly the underweight to financials and overweight to materials. The
underweight to Japan and positioning within emerging markets positively impacted results.
Proprietary Funds
Net client cash flows related to proprietary funds decreased $0.7 billion during the three months
ended March 31, 2011, compared to the corresponding period in 2010, mainly as a result of:
|
|
a $0.4 billion decrease in our Global High Income Funds net client cash inflows; |
|
|
|
a $0.1 billion increase in our International Equity I Funds net client cash outflows; and |
|
|
|
a $0.1 billion increase in our International Equity II Funds net client cash outflows. |
Institutional Commingled Funds
Net client cash flows related to institutional commingled funds decreased $0.3 billion during the
three months ended March 31, 2011, compared to the corresponding period in 2010, mainly as a result
of:
|
|
a $0.1 billion increase in our International Equity I vehicles net client cash outflows;
and |
|
|
|
a $0.1 billion increase in our International Equity II vehicles net client cash outflows. |
27 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
Separate Accounts
Net client cash flows related to separate accounts decreased $2.0 billion during the three months
ended March 31, 2011, compared to the corresponding period in 2010, mainly as a result of:
|
|
|
a $0.9 billion increase in our International Equity II strategys net client cash outflows; |
|
|
|
|
a $0.8 billion increase in our International Equity I strategys net client cash outflows; |
|
|
|
|
a $0.2 billion decrease in our High Yield strategys net client cash flows, as the three
months ended March 31, 2011, had net client cash outflows compared to net client cash inflows
in the three months ended March 31, 2010; and |
|
|
|
|
a $0.2 billion decrease in our Global Equity strategys net client cash inflows, |
partially offset by:
|
|
a $0.1 billion increase in our High Grade Fixed Income strategys net client cash flows as
the three months ended March 31, 2011, had net client cash inflows compared to net client cash
outflows in the three months ended March 31, 2010. |
Sub-advisory Accounts
Net client cash flows related to sub-advised accounts decreased $0.3 billion during the three
months ended March 31, 2011, compared to the corresponding period in 2010, mainly as a result of:
|
|
a $0.2 billion decrease in our High Yield strategys net client cash inflows; and |
|
|
|
a $0.2 billion increase in our International Equity II strategys net client cash outflows. |
Revenues and Other Operating Income
Our revenues are driven by investment management fees earned from managing clients assets.
Investment management fees fluctuate based on the total value of AuM, composition of AuM among our
investment vehicles and among our investment strategies, changes in the investment management fee
rates on our products and, for the few accounts on which we are eligible to earn performance based
fees, the investment performance of those accounts.
The following table sets forth average AuM, the effective fee rate and Total revenues and other
operating income for the three months ended March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands, except for Average AuM, effective fee rate and percentages) |
|
2011 |
|
2010 |
|
% Change |
Average AuM (in millions) |
|
$ |
52,659 |
|
|
$ |
54,711 |
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective fee rate (basis points) |
|
|
63.0 |
|
|
|
63.2 |
|
|
|
(0.2 |
)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management fees |
|
$ |
81,776 |
|
|
$ |
85,287 |
|
|
|
(4 |
)% |
Net gains on funds held for deferred compensation |
|
|
419 |
|
|
|
321 |
|
|
|
31 |
|
Foreign currency gains (losses) |
|
|
(18 |
) |
|
|
23 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and other operating income |
|
$ |
82,177 |
|
|
$ |
85,631 |
|
|
|
(4 |
) |
|
Total revenues and other operating income decreased by $3.5 million for the three months ended
March 31, 2011, compared to the corresponding period in 2010, due primarily to a 4% decline in
average AuM.
There were no performance fees in the three months ended March 31, 2011 and 2010.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands, except percentages) |
|
2011 |
|
2010 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
$ |
28,018 |
|
|
$ |
25,169 |
|
|
|
11 |
% |
Shareholder servicing and marketing |
|
|
4,865 |
|
|
|
4,548 |
|
|
|
7 |
|
General and administrative |
|
|
10,172 |
|
|
|
10,285 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
43,055 |
|
|
$ |
40,002 |
|
|
|
8 |
|
|
Operating expenses increased by $3.1 million for the three months ended March 31, 2011, compared to
the corresponding period in 2010, mainly due to higher incentive compensation and higher
shareholder servicing costs.
Employee Compensation and Benefits
Employee compensation and benefits increased $2.8 million for the three months ended March 31,
2011, compared to the corresponding period in 2010, due primarily to an increase in incentive
compensation accruals, increased amortization expense of prior year deferred incentive compensation
awards, accruals associated with our new long-term incentive program, and an increase in salary and
benefit costs resulting from our decision to selectively increase headcount during 2010.
Shareholder Servicing and Marketing
Shareholder servicing and marketing expenses increased $0.3 million for the three months ended
March 31, 2011, compared to the corresponding period in 2010, due primarily to higher platform
charges, partially offset by lower marketing expenses.
General and Administrative
General and administrative expenses were relatively unchanged as compared to the corresponding
period in 2010.
Non-operating Income (Loss)
Non-operating income (loss) primarily results from income on the Consolidated Investment Products
and interest expense incurred on borrowings under our term credit facility. The following table
sets forth Non-operating income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands, except percentages) |
|
2011 |
|
2010 |
|
% Change |
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments of the Consolidated Investment Products |
|
$ |
567 |
|
|
$ |
|
|
|
|
* |
% |
Other investments |
|
|
|
|
|
|
1 |
|
|
|
(100 |
) |
Interest expense |
|
|
(526 |
) |
|
|
(661 |
) |
|
|
20 |
|
Net gains on investments of the Consolidated Investment Products |
|
|
351 |
|
|
|
|
|
|
|
* |
|
Net gains (losses) on other investments |
|
|
181 |
|
|
|
(1 |
) |
|
|
* |
|
Other income |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income (loss) |
|
$ |
565 |
|
|
$ |
(661 |
) |
|
|
185 |
|
|
* Calculation not meaningful.
We recorded non-operating income for the three months ended March 31, 2011, compared to a
non-operating loss in the corresponding period in 2010, primarily due to net gains on investments
and interest income of the Consolidated Investment Products, and lower interest expense on our
borrowing under our term credit facility, resulting from the partial pay-down of the debt.
29 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
Income Taxes
Investors is organized as a Delaware corporation, and therefore is subject to U.S. Federal, state
and local income taxes. As a member of Holdings, Investors incurs U.S. Federal, state and local
income taxes on its allocable share of income of Holdings, including its wholly owned subsidiaries.
Our effective tax rates were 42% for the three months ended March 31, 2011, and 33% for the three
months ended March 31, 2010. For tax purposes, the Principals, through their member interests, are
taxed on their share of Holdings income. Accordingly, we do not account for the U.S. Federal and
state income taxes on the income of Holdings allocable to the Principals member interests. As of
March 31, 2011, the Principals non-controlling interests in Holdings are approximately 2% and as
of March 31, 2010, the Principals non-controlling interests were approximately 26% and as a
result, our effective tax rate is higher in 2011.
Our effective tax rate would have been approximately 43% for the three months ended March 31, 2011,
had the Principals exchanged all of their New Class A Units at the beginning of the period.
Liquidity and Capital Resources
Working Capital
Below is a table showing our liquid assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
As of December 31, |
|
|
(in thousands, except percentages) |
|
2011 |
|
2010 |
|
% Change |
Cash and cash equivalents |
|
$ |
71,774 |
|
|
$ |
80,043 |
|
|
|
(10 |
)% |
Less: cash held by the Consolidated Investment Products |
|
|
(754 |
) |
|
|
(811 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,020 |
|
|
|
79,232 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees receivable and accrued fees, net of allowance for
doubtful accounts |
|
|
51,940 |
|
|
|
54,373 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquid assets |
|
$ |
122,960 |
|
|
$ |
133,605 |
|
|
|
(8 |
) |
|
In the first quarter of 2011, we paid $5.0 million to our principals under the tax receivable
agreement, repaid $4.5 million in borrowings under our term credit facility and paid 2010 incentive
compensation awards, which were accrued during 2010. Our term credit facility requires quarterly
principal payments of $4.5 million for two years, which began in December 2010, with a final
payment of $24.0 million at maturity in 2012. We expect to make seed capital investments of up to
an aggregate of $30.0 million in 2011.
In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million
shares of our common stock, which will expire on December 31, 2013. As of March 31, 2011, we have
not repurchased any shares under this program.
On April 25, 2011, our Board of Directors declared a dividend of $0.06 per share to be paid on May
25, 2011, to holders of record of our Class A and Class C common stock at the close of business on
May 11, 2011. To provide funding for the dividend payable to the holders of record of our Class A
and Class C common stock, a distribution by Holdings of $0.06 per New Class A Unit will be paid to
all members of Holdings, including the Principals.
Our working capital requirements historically have been met through
operating cash flows. In the
future, we may rely on both our operating cash flows and borrowing facilities to meet our working
capital requirements. We believe our current working capital and $100.0 million revolving credit
facility are sufficient to meet our current obligations and support our organic growth initiatives.
We did not use the revolving credit facility during the three months ended March 31, 2011 or 2010.
The Consolidated Investment Products employ leverage with the goal of enhancing investment returns.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 30
Debt
In September 2009, Holdings entered into a $110.0 million credit facility consisting of a $60
million three-year term credit facility and a $50.0 million three-year revolving credit facility.
In January 2011, Holdings increased the capacity of its revolving credit facility from $50.0
million to $100.0 million. In October 2009, we borrowed $60 million under the term credit facility
and began quarterly repayments in December 2010. As of March 31, 2011, we have repaid $9.0 million
on our borrowings under the term credit facility.
The credit facility agreement also contains customary affirmative and negative covenants, including
limitations on indebtedness, liens, cash dividends and fundamental corporate changes. As of March
31, 2011, our consolidated leverage ratio was 0.3:1 and our consolidated interest coverage ratio
was 79:1, each in compliance with our debt covenants.
Our average outstanding borrowings under the term credit facility were $55.5 million in the quarter
ended March 31, 2011. We had no borrowings under the revolving credit facility.
Cash Flows
The following table sets forth our cash flows for the first three months of 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in thousands, except percentages) |
|
2011 |
|
2010 |
|
% Change |
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
1,276 |
|
|
$ |
17,864 |
|
|
|
(93 |
)% |
Net cash used in investing activities |
|
|
(3,369 |
) |
|
|
(353 |
) |
|
|
* |
|
Net cash used in financing activities |
|
|
(6,158 |
) |
|
|
(3,605 |
) |
|
|
(71 |
) |
Effect of exchange rate changes on cash |
|
|
(18 |
) |
|
|
23 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(8,269 |
) |
|
$ |
13,929 |
|
|
|
(159 |
) |
|
* Calculation not meaningful.
Net cash provided by operating activities decreased $16.6 million in the three months ended
March 31, 2011, compared to the corresponding period in 2010, primarily reflecting $5.0 million
paid to the Principals under the tax receivable agreement, higher incentive compensation payments,
and investment purchases by the Consolidated Investment Products. Since we pay bonuses in the first
quarter of the year, it is the period of our highest use of cash.
Net cash used in investing activities increased $3.0 million in the three months ended March 31,
2011, compared to the corresponding period in 2010, primarily reflecting deferred compensation
investments.
Net cash used by financing activities increased $2.6 million in the three months ended March 31,
2011, compared to the corresponding period in 2010, primarily a reflecting a $4.5 million repayment
of the borrowing under the term credit facility in 2011, partially offset by capital contributions
to the Consolidated Investment Products.
Deferred Taxes
The majority of our deferred tax assets are recoverable over a 15-year period and recovery will
depend on our ability to generate sufficient taxable income. The step-up in tax basis resulting
from the exchanges of New Class A Units resulted in $197.0 million of deferred tax assets, which
would require annual average taxable income of $32.8 million (at an estimated effective tax rate of
40%) to be recovered in full. Based on several factors, including historical taxable income and
current levels of AuM, we believe that it is more likely than not that there will be sufficient
annual taxable income to realize the deferred tax asset and, therefore, no valuation allowance is
necessary. We realized $5.8 million of the deferred tax asset in our 2010 income tax return and
expect to realize approximately $8.8 million of the deferred tax asset in our 2011 income tax
return.
The tax benefits arising from the step-up in tax basis are shared between us and the Principals
under a tax receivable agreement. If we are unable to utilize all of the tax benefits from the
step-up in tax basis, 85% of the unused amount,
31 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
representing the Principals portion of such
benefits, will reduce the amounts payable to them, which are classified as
Due under tax receivable agreement in the Consolidated Statement of Financial Position, and the
remaining 15% will be charged to Income taxes in the Consolidated Statement of Operations.
Off-Balance Sheet Arrangements
The Consolidated Investment Products held credit default swaps, foreign exchange forward contracts
and options as of March 31, 2011. As of March 31, 2011, the aggregate notional/nominal amount of
credit default swaps and foreign exchange forward contracts and options outstanding was $25.8
million. (See Notes to the Consolidated Financial Statements, Note 6. Derivative Contracts.)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in our Managements Discussion and Analysis of Financial Condition and
Results of Operations and in other sections of this Report on Form 10-Q that are forward-looking
statements. In some cases, you can identify these statements by forward-looking words such as
may, might, will, should, expects, plans, anticipates, believes, estimates,
predicts, potential or continue, the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks, uncertainties and
assumptions, may include projections of our future financial performance, our anticipated growth
strategies, descriptions of new business initiatives, investor behavior, our free cash flow and
anticipated trends in our business. These statements are only predictions based on our current
expectations and projections about future events. There are important factors that could cause our
actual results, level of activity, performance or achievements to differ materially from the
results, level of activity, performance or achievements expressed or implied by the forward-looking
statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, level of activity, performance or achievements. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any of these forward-looking statements
after the date of this Report on Form 10-Q to conform our prior statements to actual results or
revised expectations.
Our 2010 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission
(SEC) on February 25, 2011 (Form 10-K), pursuant to the provisions of the Securities Act of
1934, listed various important factors that could cause actual results to differ materially from
projected and historic results. We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. You can find them in our Form 10-K under the heading
Risk Factors. We incorporate that section of the Form 10-K in this filing and readers of this
Report on Form 10-Q should refer to it. It is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete set of all potential risks or
uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Revenues and Other Operating Income
Our exposure to market risk is directly related to the value of the proprietary funds,
institutional commingled funds, separate accounts and sub-advised accounts we manage. Substantially
all of our revenue is derived from investment advisory agreements with these funds and accounts.
Under these agreements, the fees we receive are based on the fair value of the assets under
management (AuM) and our fee rates. Accordingly, our revenue and income may decline as a result
of:
|
|
the value of AuM decreasing; |
|
|
|
our clients withdrawing funds; or |
|
|
|
a shift in product mix to lower margin products. |
Our AuM was $51.3 billion as of March 31, 2011. Assuming a 10% increase or decrease in the value of
the AuM and the change being proportionally distributed over all our products, the fair value would
increase or decrease by
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 32
$5.1 billion, which would cause an annualized increase or decrease in Total
revenues and other operating income of approximately $32.3 million at our current effective fee
rate.
We have not adopted a corporate-level risk management policy regarding the hedging of client
assets, nor have we historically attempted to hedge revenue risks that would arise from
fluctuations in the fair value of separate client portfolios or our overall AuM.
Investments
We are subject to market risk from a decline in the price of investments that we own to fund future
deferred compensation liabilities, as well as from changes in the price of investments held by the
Consolidated Investment Products. As of March 31, 2011, the securities we own to fund future
deferred compensation liabilities consisted of Artio Global Funds. Management regularly monitors
the value of these investments; however, given their nature and relative size, we have not adopted
a specific risk management policy to manage the associated market risk. Gains or losses on
investments that we own to manage future deferred compensation liabilities correlate with related
adjustments to compensation expense over the service period of the deferred compensation.
As of March 31, 2011, the securities owned by the Consolidated Investment Products, net of
investments sold, not yet purchased, consisted primarily of equity securities, corporate bonds,
term loans and asset-backed securities. The fair value of these investments was $32.0 million as of
March 31, 2011. Assuming a 10% increase or decrease in the values of these investments, the fair
value would increase or decrease by $3.2 million as of March 31, 2011.
Exchange Rate Risk
A substantial portion of the accounts that we advise, or sub-advise, hold investments that are
exposed to currencies other than the U.S. dollar. These client portfolios may hold currency
forwards or other derivative instruments. The fair value of these investments and instruments are
affected by movements in the rate of exchange between the U.S. dollar and the underlying foreign
currency. Such movements in exchange rates affect the fair value of assets held in accounts we
manage, thereby affecting the amount of revenue we earn. The fair value of the assets we manage was
$51.3 billion as of March 31, 2011. The U.S. dollar fair value of AuM would decrease, with an
increase in the value of the U.S. dollar, or increase, with a decrease in the value of the U.S.
dollar. Our exposure to foreign currencies may change significantly on a daily basis, therefore,
our average daily foreign currency exposure may be significantly different than at period end. A
10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value
of the AuM by $3.9 billion, which would cause an annualized increase or decrease in Total revenues
and other operating income of $24.6 million. As of March 31, 2011, approximately 76% of our AuM
had exposure to currencies other than the U.S. dollar.
The
composition of the exposure within our AuM approximates:
|
|
|
|
|
|
|
|
As of |
|
|
March 31, 2011 |
Euro |
|
|
17 |
% |
British pound |
|
|
12 |
|
Japanese yen |
|
|
8 |
|
Hong Kong dollar |
|
|
7 |
|
Canadian dollar |
|
|
5 |
|
Other (representing approximately 40 currencies) |
|
|
27 |
|
|
|
|
|
|
|
76 |
% |
|
The investments held as of March 31, 2011, were primarily denominated in U.S. dollars. The
investments held in relation to the deferred compensation plan include Artio Global Funds whose
underlying assets are primarily non-dollar denominated. The effect of a 10% change in exchange
rates on such securities would not have a material effect on the financial statements.
33 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
Interest Rate Risk
The Consolidated Investment Products and certain of the accounts we advise or sub-advise own fixed
income securities. Further, from time to time, we may invest our excess cash balances in short-term
U.S. government fixed income securities. Interest rate changes affect the fair value of such
investments or the revenue we earn from them.
Assuming a 100 basis point increase or decrease in interest rates, we estimate that the value of
the fixed income securities we manage or sub-advise would change by approximately $405.9 million.
The impact of such changes would not be material to our revenues or net income.
In connection with borrowings under our $60 million term credit facility, assuming a 100 basis
point increase or decrease in the LIBOR rate, the impact of such a change would not be material to
our net income.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the Exchange Act)). Based on this evaluation, our principal executive officer and principal
financial and accounting officer concluded that our disclosure controls and procedures are
effective in alerting them in a timely manner to information required to be disclosed in our
periodic reports filed with the SEC.
During our most recent fiscal quarter, there has not occurred any change in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We have been named in certain litigation. In the opinion of management, the possibility of an
outcome from this litigation that is materially adverse to us is remote.
Item 1A. Risk Factors.
Our 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February
25, 2011 (Form 10-K), contains a section entitled Risk Factors. We incorporate that section of
the Form 10-K in this filing and readers should refer to it.
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Investors share repurchase activity for each of the three months in the period ended March 31,
2011, was as follows:
|
|
|
|
|
|
|
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|
Total Number of |
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Approximate Shares |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
that May Yet be |
|
|
Total Number of |
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|
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as Part of Publicly |
|
Purchased Under |
|
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Shares |
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Average Price Paid |
|
Announced Plans |
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the Plans or |
Period |
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Repurchased(a) |
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Per Share |
|
or Programs(a) |
|
Programs(a) |
January 1, 2011 through January 31, 2011 |
|
|
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|
|
$ |
|
|
|
|
|
|
|
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3,000,000 |
|
February 1, 2011 through February 28, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000 |
|
March 1, 2011 through March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2011 |
|
|
|
|
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|
|
|
|
|
|
|
|
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3,000,000 |
|
|
|
|
|
(a) |
|
In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0
million shares of our common stock, which expires on December 31, 2013. As of March 31, 2011,
we have not repurchased any shares under this program. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
Item 6. Exhibits.
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1) Exhibit 31.1
|
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Certification by the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
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2) Exhibit 31.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
3) Exhibit 32.1
|
|
Certification by the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
4) Exhibit 32.2
|
|
Certification by the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
35 Artio Global Investors Inc. First Quarter 2011 Form 10-Q
SIGNATURES
Pursuant to the requirements 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, in the City
of New York, State of New York, on May 6, 2011.
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Artio Global Investors Inc. |
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By: |
/s/ Francis Harte
|
|
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Name: |
Francis Harte |
|
|
Title: |
Chief Financial Officer
(Principal Financial and Accounting Officer) |
Artio Global Investors Inc. First Quarter 2011 Form 10-Q 36