ITEM 1. BUSINESS

OVERVIEW

We buy and hold equity interests in mid-sized investment management firms (our "Affiliates") and currently derive all of our revenues from those firms. We hold investments in 15 Affiliates that in aggregate managed $87.0 billion in assets at December 31, 1999. Our most recent investments were in Rorer Asset Management, LLC (January 1999), The Managers Funds LLC (April 1999), and Frontier Capital Management Company, LLC (January 2000).

We were founded in 1993 to address the succession and ownership transition issues facing the founders and principal owners of many mid-sized investment management firms. We did this because we believed that many wanted a new alternative for shifting ownership to the next generation of management. We developed an innovative transaction structure to serve as a succession planning alternative for these firms.

A key component of our transaction structure is our purchase of majority interests in these firms, with certain exceptions (such as The Managers Funds LLC ("Managers")) as further described below. Within this structure, we allow ongoing managers to keep a significant ownership interest in their firms which they may sell to us in the future, we give management autonomy over the day-to-day operations of their firm, and we allow management to decide how to spend a fixed portion of revenues on salaries, bonuses and other operating expenses.

We implement our structure through a revenue sharing arrangement with each of our Affiliates (other than Managers). This arrangement allocates a specified percentage of revenues, typically 50-70%, for use by the Affiliate's management in paying the salaries, bonuses and other operating expenses (the "Operating Allocation") of the Affiliate. The remaining portion of revenues, typically 30-50% (the "Owners' Allocation"), is allocated to the owners of that Affiliate, including us, generally in proportion to ownership of the Affiliate. At some Affiliates, we receive a guaranteed payment for the use of our capital or a license fee which in each case is paid from that portion of revenues which we refer to as our Owners' Allocation. We believe that our structure is particularly appealing to managers of firms which anticipate strong future growth, because it gives them the opportunity to profit from an Affiliate's growth through this revenue sharing arrangement. Unlike all other Affiliates, Managers is not subject to a revenue sharing arrangement since we own substantially all of the firm. As a result, we participate fully in any increase or decrease in the revenues or expenses of the firm.

We generally seek to acquire interests in investment management firms with $500 million to $15 billion of assets under management. The growth in the investment management industry has resulted in a significant increase in the number of firms in this size range. We have identified over 1,300 of these firms in the United States, Canada and the United Kingdom. We believe that a substantial number of investment opportunities will continue to arise as founders of these firms approach retirement age and begin to plan for succession. We also anticipate significant additional investment opportunities in firms that are currently wholly-owned by larger entities. We believe that we can take advantage of these investment opportunities because our management team has substantial industry experience and expertise in structuring and negotiating transactions, as well as a highly organized process for identifying and contacting investment prospects.

HOLDING COMPANY OPERATIONS

Our management performs two primary functions:

- implementing our strategy of growth through acquisitions of interests in prospective Affiliates; and

- supporting, enhancing, and monitoring the activities of our existing Affiliates.

ACQUISITION OF INTERESTS IN PROSPECTIVE AFFILIATES

The acquisition of interests in new Affiliates is a primary element of our growth strategy. Our management takes responsibility for each step in this process, including identification and contact of potential Affiliates, and the valuation, structuring and negotiation of transactions. While we try to initiate our discussions with potential Affiliates on an exclusive basis, we have been competitive in cases where investment bankers have been involved.

Our management identifies and develops relationships with promising potential Affiliates based on a thorough understanding of the universe of mid-sized investment management firms derived from our proprietary database made up of data from third party vendors, public and industry sources and our own research. We use this database to screen and prioritize investment prospects. We also use the database to monitor the level and frequency of interaction with potential Affiliates. This database and our related contact management system help us to identify promising potential Affiliates and to develop and maintain relationships with these firms.

We try to increase awareness of our approach to investing by actively participating in conferences and seminars related to succession planning for investment management firms. These activities lead to a substantial number of unsolicited calls from firms considering succession planning issues. In addition, our management maintains an active calling program in order to develop relationships with prospective Affiliates. In the past four years, our management has visited approximately 475 firms. We believe we have established ongoing relationships with a substantial number of firms which will be considering succession planning alternatives in the future.

Once discussions with a target firm lead to transaction negotiations, our management team performs all of the functions related to the valuation, structuring and negotiation of the transaction. Our management team includes professionals with substantial experience in mergers and acquisitions of investment management firms.

Upon the negotiation and execution of definitive agreements, the target firm contacts its clients to notify them and seek their consent to the transaction (which constitutes an assignment of the firm's investment advisory contracts), as required by the Investment Advisers Act of 1940, as amended. If the firm has mutual fund clients, the firm seeks new contracts with those funds, as required by the Investment Company Act of 1940, as amended. The new contracts must be approved by the funds' shareholders through a proxy process.

Descriptions of our most recently completed Affiliate investments in Rorer Asset Management, LLC ("Rorer"), Managers and Frontier Capital Management Company, LLC ("Frontier") are set forth below.

RORER ASSET MANAGEMENT, LLC

Rorer is a value-oriented equity and fixed income manager based in Philadelphia which offers four types of investment management accounts:
large-capitalization equity, mid-capitalization equity, balanced and fixed income. Founded in 1978, Rorer is led by its founder, Chairman and Chief Investment Officer Edward C. Rorer, and a committee including James G. Hesser, President, and Clifford B. Storms, Jr., Director of Research.

THE MANAGERS FUNDS LLC

Managers is a mutual fund company based in Norwalk, Connecticut which employs an innovative business model for The Managers Funds, a no-load mutual fund family it manages and distributes, whereby it selects sub-advisers from a universe of over a thousand investment managers. Managers also manages and distributes Managers AMG Funds, a no-load mutual fund family. Essex Aggressive Growth Fund, the first series of Managers AMG Funds, commenced operations on November 1, 1999. The mutual funds advised by Managers are distributed to retail and institutional clients directly and through intermediaries

including independent investment advisers, 401(k) plan sponsors and alliances, broker-dealers, major fund programs, and bank trust departments.

FRONTIER CAPITAL MANAGEMENT COMPANY, LLC

Frontier is a Boston-based investment adviser, which provides investment services to a diverse client base including corporate, public and multi-employer pension and profit sharing plans, foundations, endowment and high net worth individuals. Frontier employs a disciplined stock selection process driven by internal research which targets companies with prospects for above-average earnings growth over extended time periods. The firm offers a broad range of investment management products, including small-cap growth equity, growth equity, capital appreciation, mid-cap growth equity, large-cap growth equity, balanced, and long/short investment partnerships. Frontier was founded in 1980 by the firm's Chairman, J. David Wimberly, who, along with President Thomas W. Duncan and Frontier's other management partners, continue to lead the firm.

AFFILIATE DEVELOPMENT

In addition to pursuing new investments, we seek to support and enhance the growth and operations of our Affiliates. We believe that the management of each Affiliate is in the best position to assess its firm's needs and opportunities, and that the autonomy and culture of each Affiliate should be preserved. However, we provide strategic, marketing and operational assistance to our Affiliates, and believe that our Affiliates find these support services attractive because the services otherwise may not be as accessible or affordable to mid-sized investment management firms.

One way we support the growth and operations of our Affiliates is by providing a cost-effective way to access the mutual fund marketplace through our Affiliate, Managers. In November 1999, we launched Managers AMG Funds, a no-load mutual fund family managed by Managers and distributed to retail and institutional clients directly by Managers and through intermediaries. The first series in this family of funds is the Essex Aggressive Growth Fund, which is sub-advised by our Affiliate, Essex Investment Management Company, LLC.

Another way we seek to enhance the growth of our Affiliates is by helping them acquire smaller investment management firms or teams which are not suitable as stand-alone investments for us. Mid-sized firms may have difficulty finding and capitalizing on these opportunities on their own. As an example, in December 1999, we assisted our Affiliate, First Quadrant, L.P. in the acquisition of Objective Asset Management Ltd. ("Objective").

Other initiatives to support our Affiliates have included:

- new product development,

- marketing material development,

- institutional sales assistance,

- recruiting,

- compensation evaluation,

- development of client servicing technology,

- regulatory compliance audits, and

- client satisfaction surveys.

We also work to obtain discounts on some of the products and services that our Affiliates need, such as:

- sales training seminars,

- public relations services,

- insurance, and

- retirement benefits.

OUR STRUCTURE AND RELATIONSHIP WITH AFFILIATES

As part of our investment structure, each of our Affiliates is organized as a separate and largely autonomous limited liability company or partnership. Each Affiliate operates under its own organizational document, either a limited liability company agreement or partnership agreement, which includes provisions regarding the use of the Affiliate's revenues and the management of the Affiliate. The organizational document also generally gives management owners the ability to realize the value of their retained equity interests in the future. While the organizational document of each Affiliate is agreed upon at the time of our investment, from time to time we agree to amendments to accommodate our business needs or those of our Affiliates.

OPERATIONAL AUTONOMY OF AFFILIATES

We develop the management provisions in each organizational document jointly with the Affiliate's senior management at the time we make our investment. Each organizational document has provisions that differ from the others. However, all of them (with the exception of the organizational documents of Managers) give the Affiliate's management team the power and authority to carry on the day-to-day operations and management of the Affiliate, including matters relating to:

- personnel,

- investment management,

- policies and fee structures,

- product development,

- client relationships, and

- employee compensation programs.

In the case of Managers, the organizational documents do not provide such operational and management autonomy.

We retain, however, the authority to prevent specified types of actions which we believe could adversely affect cash distributions to us, as well as the authority to cause certain types of actions to protect our interests. For example, none of the Affiliates may incur material indebtedness without our consent. We do not directly engage in the business of providing investment advice and, therefore, are not registered as an investment adviser.

REVENUE SHARING ARRANGEMENTS

When we make an investment in an Affiliate (other than Managers), we negotiate a revenue sharing arrangement with that Affiliate, which we place in its organizational document. The revenue sharing arrangement allocates a percentage of revenues (typically 50-70%) for use by management of that Affiliate in paying operating expenses of the Affiliate, including salaries and bonuses. We call this the "Operating Allocation". We determine the percentage of revenues designated as Operating Allocation for each

Affiliate in consultation with senior management of the Affiliate at the time of our investment based on the Affiliate's historical and projected operating margins. The organizational document of each Affiliate allocates the remaining portion of the Affiliate's revenues (typically 30-50%) to the owners of that Affiliate (including us), generally in proportion to their ownership of the Affiliate. We call this the "Owners' Allocation" because it is the portion of revenues which the Affiliate's management is prohibited from spending on operating expenses without our prior consent. Each Affiliate distributes its Owners' Allocation to its management owners and us generally in proportion to our respective ownership interests in that Affiliate. At some Affiliates, we receive a guaranteed payment for the use of our capital or a license fee which in each case is paid from that portion of revenues which we refer to as our Owners' Allocation. Unlike all other Affiliates, Managers is not subject to a revenue sharing arrangement since we own substantially all of the firm. As a result, we participate fully in any increase or decrease in the revenues or expenses of Managers.

Before agreeing to these allocations, we examine the revenue and expense base of the firm. We only agree to a division of revenues if we believe that the Operating Allocation will cover operating expenses of the Affiliate, including in cases involving a foreseeable increase in expenses, or a likely decrease in revenues without a corresponding decrease in operating expenses. While our management has significant experience in the asset management industry, we cannot be certain that we will successfully anticipate changes in the revenue and expense base of any firm. Therefore, we cannot be certain that the agreed-upon Operating Allocation will be large enough to pay for all operating expenses, including salaries and bonuses of the Affiliate.

One of the purposes of our revenue sharing arrangements is to provide ongoing incentives for the managers of each Affiliate by allowing them:

- to participate in their firm's growth through their compensation from the Operating Allocation,

- to receive a portion of the Owners' Allocation based on their ownership interest in the Affiliate, and

- to control operating expenses, thereby increasing the portion of the Operating Allocation which is available for growth initiatives and bonuses for management of the Affiliate.

The managers of each Affiliate, therefore, have an incentive to both increase revenues (thereby increasing the Operating Allocation and their Owners' Allocation) and to control expenses (thereby increasing the excess Operating Allocation).

The revenue sharing arrangements allow us to participate in the revenue growth of each Affiliate because we receive a portion of the additional revenue as our share of the Owners' Allocation. However, we participate in that growth to a lesser extent than the managers of the Affiliate, because we do not share in the growth of the Operating Allocation.

Under the organizational documents of each Affiliate (other than Managers), the allocations and distributions of cash to us generally take priority over the allocations and distributions to the management owners of each Affiliate. This further protects us if there are any expenses in excess of the Operating Allocation of an Affiliate. Thus, if an Affiliate's expenses exceed its Operating Allocation, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's management owners until that portion is eliminated, and then reduce the portion allocated to us. Any such reduction in our portion of the Owners' Allocation is required to be paid back to us out of the portion of future Owners' Allocation allocated to the Affiliate's management owners. Unlike all other Affiliates, Managers is not subject to a revenue sharing arrangement since we own substantially all of the firm. As a result, we participate fully in any increase or decrease in the revenues or expenses of Managers.

OUR PURCHASE OF ADDITIONAL INTERESTS IN OUR EXISTING AFFILIATES

Under our transaction structure, the management team at each Affiliate retains an ownership interest in its own firm. We consider this a key way that we provide management owners with incentives to grow their firms. In order to provide as much incentive as we can, we include in the organizational documents of each Affiliate (other than Paradigm Asset Management Company, LLC) "put" rights for its management owners. The put rights require us periodically to buy part of the management owners' interests in the Affiliate for cash, shares of our Common Stock or a combination of both. In this way, the management owners can realize a portion of the equity value that they have created in their firm. In addition, the organizational documents of some of our Affiliates provide us with "call" rights that let us require the management owners to sell us portions of their interests in the Affiliate. Finally, the organizational documents of each Affiliate include provisions obligating each such owner to sell his or her remaining interests at a point in the future, generally after the termination of his or her employment with the Affiliate. Underlying all of these provisions is our basic philosophy that management owners of each Affiliate should maintain an ownership level in that Affiliate within a range that offers them sufficient incentives to grow and improve their business to create equity value for themselves.

PUT RIGHTS

The put rights are designed to let the management owners sell portions of their retained ownership interest for cash, shares of our Common Stock or a combination of both, prior to their retirement. In addition, as an alternative to simply purchasing all of a management owner's interest in the Affiliate following the termination of his or her employment, the put rights enable us to purchase additional interests in the Affiliates at a more gradual rate. We believe that a more gradual purchase of interests in Affiliates will make it easier for us to keep our ownership of each Affiliate within a desired range. We intend to continue providing equity participation opportunities in our Affiliates to more junior members of their management as well as to key new hires.

In most cases, the put rights do not become exercisable for a period of several years from the date of our investment in an Affiliate. Once exercisable, the put rights generally are limited in the aggregate to a percentage of the management owner's ownership interests. The most common formulation among all the Affiliates is that a management owner's put rights:

- do not commence for five years from the date of our investment (or, if later, the date he or she purchased his or her interest in the Affiliate),

- are limited, in the aggregate, to fifty percent of the management owner's interests in the Affiliate, and

- are limited, in any twelve-month period, to ten percent of the greatest interest he or she held in the Affiliate. In addition, the organizational documents of the Affiliates often contain a limitation on the maximum total amount that management of any Affiliate may require us to purchase pursuant to their put rights in any given twelve-month period.

The purchase price under the put rights is generally based on a multiple of the Affiliate's Owners' Allocation at the time the right is exercised, with the multiple generally having been determined at the time we made our initial investment.

CALL RIGHTS

The call rights are designed to assure us and the management members of some of our Affiliates that we can facilitate some transition within the senior management team after an agreed-upon period of time. The call rights vary in each specific instance, but in all cases the timing, mechanism and price are agreed upon when we make our investment. The price is payable in cash, shares of our Common Stock or a combination of both.

BUY-OUT RIGHTS

The organizational documents of each Affiliate provide that the management owners will realize the remaining equity value they have created generally following the termination of their employment with the Affiliate. In general, upon a management owner's retirement after an agreed-upon number of years, or upon his or her earlier death, permanent incapacity or termination without cause (but with our consent), that management owner is required to sell to us (and we are required to purchase from the management owner) his or her remaining interests. The purchase price in these cases is payable either in cash, shares of our Common Stock or a combination of both. The purchase price is generally based on the same formulas that apply to put rights. In general, if a management owner quits early or is terminated for cause, his or her interests will be purchased by us for cash at a substantial discount to the price that he or she would otherwise be paid. Also, if a management owner quits or is terminated for cause within the first several years following our investment (or, if later, the date the management owner purchased his or her interest in the Affiliate), the management owner generally receives nothing for his or her retained interest.

If an Affiliate collects any key-man life insurance or lump-sum disability insurance proceeds upon the death or permanent incapacity of a management owner, the Affiliate must use that money to purchase his or her interests. A purchase by an Affiliate would have the effect of ratably increasing our ownership percentage as well as each of the remaining management owners. By contrast, the purchase of interests by us only increases our ownership percentage. The organizational documents of most of the Affiliates provide for the purchase of such insurance, to the extent we have requested it. The premium costs are subtracted from the Owners' Allocation of the Affiliate, so all of the Affiliate's owners (including AMG and management) bear this cost.

THE AFFILIATES

In general, our Affiliates derive revenues by charging fees to their clients that are typically based on the market value of assets under management. In some instances, however, the Affiliates may derive revenues from fees based on investment performance.

Our Affiliates are listed below in alphabetical order and include Frontier Capital Management Company, LLC, in which we invested in January 2000. We own a majority interest of each of our Affiliates other than Paradigm, and as described above, we own substantially all interests in Managers.

                                                             PRINCIPAL          DATE OF
AFFILIATE                                                    LOCATION(S)        INVESTMENT
---------                                                    ----------------   --------------
The Burridge Group LLC ("Burridge")                          Chicago; Seattle   December 1996

Davis Hamilton Jackson & Associates, L.P. ("DHJA")           Houston            December 1998

Essex Investment Management Company, LLC ("Essex")           Boston             March 1998

First Quadrant, L.P.; First Quadrant Limited                 Pasadena, CA;
  (collectively, "First Quadrant")                           London             March 1996

Frontier Capital Management Company, LLC ("Frontier")        Boston             January 2000

GeoCapital, LLC ("GeoCapital")                               New York           September 1997

Gofen and Glossberg, L.L.C. ("Gofen and Glossberg")          Chicago            May 1997

J.M. Hartwell Limited Partnership ("Hartwell")               New York           May 1994

The Managers Funds LLC ("Managers")                          Norwalk, CT        April 1999

Paradigm Asset Management Company, L.L.C. ("Paradigm")       New York           May 1995

Renaissance Investment Management ("Renaissance")            Cincinnati         November 1995

Rorer Asset Management, LLC ("Rorer")                        Philadelphia       January 1999

Skyline Asset Management, L.P. ("Skyline")                   Chicago            August 1995

Systematic Financial Management, L.P. ("Systematic")         Teaneck, NJ        May 1995

Tweedy, Browne Company LLC ("Tweedy, Browne")                New York; London   October 1997

The following table provides the pro forma composition of our assets under management and relative EBITDA Contribution of our Affiliates for the year ended December 31, 1999. All amounts below are pro forma for the inclusion of the Rorer, Managers and Frontier investments and financing transactions as if such transactions occurred on January 1, 1999.

                                                                YEAR ENDED DECEMBER 31, 1999
                                                  --------------------------------------------------------
                                                     ASSETS
                                                      UNDER       PERCENTAGE       EBITDA       PERCENTAGE
                                                   MANAGEMENT      OF TOTAL     CONTRIBUTION     OF TOTAL
                                                  -------------   ----------   --------------   ----------
                                                  (IN MILLIONS)                (IN THOUSANDS)
CLIENT TYPE:
Institutional...................................    $ 59,724           69%        $128,104           63%
Mutual fund.....................................       7,474            9           31,936           16
High net worth..................................      15,926           18           36,912           18
Other...........................................       3,904            4            5,994            3
                                                    --------          ---         --------          ---
  Total.........................................    $ 87,028          100%        $202,946          100%
                                                    ========          ===         ========          ===
ASSET CLASS:
Equity..........................................    $ 56,420           65%        $179,240           88%
Fixed income....................................       4,495            5           10,808            5
Tactical asset allocation.......................      26,113           30           12,898            7
                                                    --------          ---         --------          ---
  Total.........................................    $ 87,028          100%        $202,946          100%
                                                    ========          ===         ========          ===
GEOGRAPHY:
Domestic investments............................    $ 63,557           73%        $157,141           77%
Global investments..............................      23,471           27           45,805           23
                                                    --------          ---         --------          ---
  Total.........................................    $ 87,028          100%        $202,946          100%
                                                    ========          ===         ========          ===

OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA:
  Total EBITDA Contribution (as above)..........                                  $202,946
                                                                                  ========
  Less holding company expenses.................                                   (17,653)
                                                                                  ========
  EBITDA(2).....................................                                  $185,293
                                                                                  ========
  Cash Net Income(3)............................                                  $112,593
                                                                                  ========

HISTORICAL FINANCIAL DATA:
  Cash flow from operating activities...........                                  $ 89,119
  Cash flow used in investing activities........                                  (112,939)
  Cash flow from financing activities...........                                    54,035

  EBITDA(2).....................................                                  $166,801
  Cash Net Income(3)............................                                    98,318
                                                                                  ========

(1) EBITDA Contribution represents the portion of an Affiliate's revenues that is allocated to us, after amounts retained by the Affiliate for compensation and day-to-day operating and overhead expenses, but before the interest, tax, depreciation and amortization expenses of the Affiliate. EBITDA Contribution does not include holding company expenses. We believe that EBITDA Contribution may be useful to investors as an indicator of our Affiliate contribution to our ability to service debt, to

make new investments and to meet working capital requirements. EBITDA Contribution is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA Contribution, as calculated by us, may not be consistent with comparable computations by other companies.

(2) EBITDA represents earnings before interest expense, income taxes, depreciation, amortization and extraordinary items. We believe EBITDA may be useful to investors as an indicator of our ability to service debt, to make new investments and to meet working capital requirements. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies.

(3) Cash Net Income represents net income plus depreciation and amortization and extraordinary items. We believe that this measure may be useful to investors as another indicator of funds available to the Company, which may be used to make new investments, repay debt obligations, repurchase shares of Common Stock or pay dividends on Common Stock. Cash Net Income is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Cash Net Income, as calculated by us, may not be consistent with computations of Cash Net Income by other companies. Cash Net Income as defined herein has historically been referred to by us as "EBITDA as adjusted".

INDUSTRY

ASSETS UNDER MANAGEMENT

The investment management sector is one of the fastest growing sectors in the financial services industry with record performance and growth in recent years. As one example of this growth, the assets under management of mutual funds increased 24% to $6.8 trillion in 1999, the fifth consecutive year of more than 20% growth, according to the Investment Company Institute. Mutual fund assets represent only a portion of the funds available for investment management, as substantial assets are managed on behalf of individuals in separate accounts, for foundations and endowments, as a portion of certain insurance contracts such as variable annuity plans and on behalf of corporations and other financial intermediaries. We believe that demographic trends and the ongoing disintermediation of bank deposits and life insurance reserves will result in continued growth of the investment management industry.

INVESTMENT ADVISERS

The growth in industry assets under management has resulted in a significant increase in the number of investment management firms within our principal targeted size range of $500 million to $15 billion of assets under management. Within this size range, we have identified over 1,300 investment management firms in the United States, Canada and the United Kingdom. We believe that, in the coming years, a substantial number of investment opportunities will arise as founders of such firms approach retirement age and begin to plan for succession. We also anticipate that there will be significant additional investment opportunities among firms which are currently wholly-owned by larger entities. We believe that we are well positioned to take advantage of these investment opportunities because we have a management team with substantial industry experience and expertise in structuring and negotiating transactions, as well as a highly organized process for identifying and contacting investment prospects.

COMPETITION

We operate as an asset management holding company organized to buy and hold equity interests in mid-sized investment management firms. We are aware of several other holding companies that have been organized to invest in or acquire investment management firms and we view these firms as among our competitors. We believe that the market for investments in asset management companies is and will continue to remain highly competitive. We compete with many purchasers of investment management firms, including other investment management holding companies, insurance companies, broker-dealers, banks and private equity firms. Many of these companies, both privately and publicly held, have longer operating histories and greater resources than we do, which may make them more attractive to the owners of firms in which we are considering an investment and may enable them to offer greater consideration to such owners. Certain of our principal stockholders also pursue investments in, and acquisitions of, investment management firms, and we may, from time to time, encounter competition from such principal stockholders with respect to certain investments. We believe that important factors affecting our ability to compete for future investments are
(i) the degree to which target firms view our investment structure as preferable, financially and operationally, to acquisition or investment arrangements offered by other potential purchasers, and (ii) the reputation and performance of the existing and future Affiliates, by which target firms will judge us and our future prospects.

Our Affiliates compete with a large number of domestic and foreign investment management firms, including public companies, subsidiaries of commercial banks, and insurance companies. Many of these firms have greater resources and assets under management than any of our Affiliates, and offer a broader array of investment products and services than any of our Affiliates. From time to time, our Affiliates may also compete with each other for clients. In addition, there are relatively few barriers to entry by new investment management firms, especially in the institutional managed accounts business. We believe that the most important factors affecting our Affiliates' ability to compete for clients are (i) the products offered, (ii) the abilities, performance records and reputation of the particular Affiliate and its management team, (iii) the management fees charged, (iv) the level of client service offered, and (v) the development of new investment strategies and marketing. The relative importance of each of these factors can vary depending on the type of investment management service involved. Each Affiliate's ability to retain and increase assets under management would be adversely affected if client accounts underperform in comparison to relevant benchmarks, or if key management or employees leave the Affiliate. The ability of each Affiliate to compete with other investment management firms is also dependent, in part, on the relative attractiveness of its investment philosophies and methods under then prevailing market conditions.

GOVERNMENT REGULATION

Our Affiliates' businesses are highly regulated, primarily by U.S. federal authorities and to a lesser extent by other authorities including non-U.S. authorities. The failure of our Affiliates to comply with laws or regulations could result in fines, suspensions of individual employees or other sanctions, including revocation of an Affiliate's registration as an investment adviser, commodity trading advisor or broker/ dealer. Each of our Affiliates (other than First Quadrant Limited) is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), and is subject to the provisions of the Investment Advisers Act and related regulations. The Investment Advisers Act requires registered investment advisers to comply with numerous obligations, including record keeping requirements, operational procedures and disclosure obligations. Each of our Affiliates (other than First Quadrant Limited) is also subject to regulation under the securities laws and fiduciary laws of several states. Moreover, some of our Affiliates, including Tweedy, Browne, Managers and Skyline, act as advisers or sub-advisers to mutual funds which are registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"). As an adviser or sub-adviser to a registered investment company, each of these Affiliates must comply with the requirements of the 1940 Act and related regulations. In addition, an adviser or

subadviser to a registered investment company generally has obligations with respect to the qualification of the registered investment company under the Internal Revenue Code of 1986, as amended.

Our Affiliates are also subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), and related regulations, to the extent they are "fiduciaries" under ERISA with respect to some of their clients. ERISA and related provisions of the Internal Revenue Code of 1986, as amended, impose duties on persons who are fiduciaries under ERISA, and prohibit some transactions involving the assets of each ERISA plan which is a client of an Affiliate, as well as some transactions by the fiduciaries (and several other related parties) to such plans. Two of our Affiliates, First Quadrant and Renaissance, are also registered with the Commodity Futures Trading Commission as commodity trading advisers and are members of the National Futures Association. Finally, Tweedy, Browne and Managers are registered under the Exchange Act as a broker-dealers and, therefore, are subject to extensive regulation relating to sales methods, trading practices, the use and safekeeping of customers' funds and securities, capital structure, record keeping and the conduct of directors, officers and employees.

Furthermore, the Investment Advisers Act and the 1940 Act provide that each investment management contract under which our Affiliates manage assets for other parties either terminates automatically if assigned, or must state that it is not assignable without consent. In general, the term "assignment" includes not only direct assignments, but also indirect assignments which may be deemed to occur upon the direct or indirect transfer of a "controlling block" of our voting securities or the voting securities of one of our Affiliates. The 1940 Act provides that all investment contracts with mutual fund clients may be terminated by such clients, without penalty, upon no later than 60 days' notice.

Several of our Affiliates are also subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies. For example, First Quadrant Limited, located in London, is a member of the Investment Management Regulatory Organization of the United Kingdom, and some of our other Affiliates are investment advisers to funds which are organized under non-U.S. jurisdictions, including Luxembourg (where the funds are regulated by the Institute Monetaire Luxembourgeois) and Bermuda (where the funds are regulated by the Bermuda Monetary Authority).

The foregoing laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict any of the Affiliates from conducting their business in the event that they fail to comply with such laws and regulations. Possible sanctions that may be imposed in the event of such noncompliance include the suspension of individual employees, limitations on the Affiliate's business activities for specified periods of time, revocation of the Affiliate's registration as an investment adviser, commodity trading adviser and/or other registrations, and other censures and fines. Changes in these laws or regulations could have a material adverse impact on our profitability and mode of operations.

Our officers, directors and employees and the officers and employees of each of the Affiliates may own securities that are also owned by one or more of the Affiliates' clients. We and each Affiliate have internal policies with respect to individual investments and require reports of securities transactions and restrict certain transactions so as to minimize possible conflicts of interest.

EMPLOYEES

As of December 31, 1999, we had 25 employees and our Affiliates employed approximately 571 persons, approximately 518 of which were full-time employees. Neither we nor any of our Affiliates is subject to any collective bargaining agreements and we believe that our labor relations are good.

CORPORATE LIABILITY AND INSURANCE

Our Affiliates' operations entail the inherent risk of liability related to litigation from clients and actions taken by regulatory agencies. In addition, we face liability both directly as a control person of our

Affiliates, and indirectly as a general partner of certain of our Affiliates. To protect our overall operations from such liability, we maintain errors and omissions and general liability insurance in amounts which we and our Affiliates consider appropriate. There can be no assurance, however, that a claim or claims will not exceed the limits of available insurance coverage, that any insurer will remain solvent and will meet its obligations to provide coverage, or that such coverage will continue to be available with sufficient limits or at a reasonable cost. A judgment against one of our Affiliates in excess of available coverage could have a material adverse effect on us.

CAUTIONARY STATEMENTS

Our growth strategy includes acquiring ownership interests in mid-sized investment management firms. To date, we have invested in 15 such firms. We intend to continue this investment program in the future, assuming that we can find suitable firms to invest in and that we can negotiate agreements on acceptable terms. We cannot be certain that we will be successful in finding or investing in such firms or that they will have favorable operating results.

We have been in operation for six years and had net losses in the first four years. While historically our growth came largely from making new investments, in recent periods the performance of our existing Affiliates has become increasingly important to our growth. We may not be successful in making new investments and the firms we invest in may fail to carry out their growth or management succession plans. As we continue to execute our business strategy, we may experience net losses in the future, which could have an adverse effect on our financial condition and prospects.

A large part of the purchase price we pay for the firms in which we invest usually consists of cash. We believe that our existing cash resources and cash flow from operations will be sufficient to meet our working capital needs for normal operations for the foreseeable future. However, we expect that these sources of capital will not be sufficient to fund anticipated investments in firms. Therefore, we will need to raise capital by making additional long-term or short-term borrowings or by selling shares of our stock, either publicly or privately, in order to complete further investments. This could increase our interest expense, decrease our net income or dilute the interests of our existing shareholders. Moreover, we may not be able to obtain financing for future investments on acceptable terms, if at all.

In January 2000, we closed our most recent investment in Frontier. After borrowings from our credit facility related to Frontier and other borrowing and repayment activity after December 31, 1999, we had $240.5 million of outstanding debt and $89.5 million available to borrow under our credit facility at March 23, 2000. We can use borrowings under our credit facility for future investments and for our working capital needs only if we continue to meet the financial tests under the terms of our credit facility. We may also expand our credit facility by an additional $70 million with the consent of our lenders. We anticipate that we will borrow more in the future when we invest in additional investment management firms. This will subject us to the risks normally associated with debt financing.

Our credit facility contains provisions for the benefit of our lenders which could operate in ways that restrict the manner in which we can conduct our business or may have an adverse impact on the interests of our stockholders. For example:

- Our borrowings under the credit facility are collateralized by pledges of all of our interests in our Affiliates (including all interests indirectly held through wholly-owned subsidiaries).

- Our credit facility contains, and future debt instruments may contain, restrictive covenants that could limit our ability to obtain additional debt financing and could adversely affect our ability to make future investments in investment management firms.

- Our credit facility prohibits us from paying dividends and other distributions to our stockholders and restricts us, our Affiliates and any other subsidiaries we may have from incurring indebtedness,

incurring liens, disposing of assets and engaging in extraordinary transactions. We are also required to comply with the credit facility's financial covenants on an ongoing basis.

- We cannot borrow under our credit facility unless we comply with its requirements.

Because indebtedness under our credit facility bears interest at variable rates, interest rate increases will increase our interest expense, which could adversely affect our cash flow and ability to meet our debt service obligations. Although we have entered into interest rate "hedging" contracts designed to offset a portion of our exposure to interest rate fluctuations above specified levels, we cannot be certain that we will continue to maintain such hedging contracts at their existing levels of coverage, the coverage maintained will cover all our indebtedness outstanding at any such time, or that this strategy will be effective. If prevailing interest rates drop below levels set in our hedging contracts, we may have to pay higher interest rates under the hedging contracts than would otherwise apply under the actual indebtedness.

Our credit facility matures in December 2002. We may not be able to obtain new financing at terms similar to our current facility, which may have the effect of increasing our interest expense, decreasing our net income or diluting the interests of our existing shareholders.

At December 31, 1999, our total assets were $909.1 million, of which $574.9 million were intangible assets consisting of acquired client relationships and goodwill. We cannot be certain that we will ever realize the value of such intangible assets. We are amortizing (writing off) these intangible assets on a straight-line basis over periods ranging from eight to 28 years in the case of acquired client relationships and 15 to 35 years in the case of goodwill. Pro forma for all investments in our Affiliates to date, amortization of intangible assets, including goodwill, would have resulted in a charge to operations of $26.9 million for the year ended December 31, 1999.

We evaluate each investment and establish appropriate amortization periods based on a number of factors including:

- the firm's historical and potential future operating performance and rate of attrition among clients,

- the stability and longevity of existing client relationships,

- the firm's recent, as well as long-term, investment performance,

- the characteristics of the firm's products and investment styles,

- the stability and depth of the firm's management team, and

- the firm's history and perceived franchise or brand value.

After making each investment, we reevaluate these and other factors on a regular basis to determine if the related intangible assets continue to be realizable and if the amortization period continues to be appropriate. In 1995 and 1996, our reevaluations resulted in the write-off of approximately $2.5 million and $4.6 million of unamortized goodwill, respectively.

Any future determination requiring the write-off of a significant portion of unamortized intangible assets could adversely affect our results of operations and financial position. In addition, we intend to invest in additional investment management firms in the future. While these firms may contribute additional revenue to us, they will also result in the recognition of additional intangible assets which will cause further increases in amortization expense.

In September 1999, the Financial Accounting Standards Board ("FASB") released for preliminary public comment its new approach to the accounting for business combinations and intangible assets. The FASB's approach provides for one method of accounting, the purchase method, for business combinations consummated after the approach is effective. The FASB's approach will also limit the goodwill amortization period to 20 years. As proposed, the new approach will not apply to goodwill recorded on transactions

initiated before the approach is effective. The final statement on this issue, which is expected to be released and effective in the fourth quarter of 2000, may present a different approach.

We currently amortize goodwill purchased in our 15 investments on a straight line basis ranging from 15 to 35 years. As a result of the FASB approach or otherwise, any changes in generally accepted accounting principles ("GAAP") that reduce the period over which we may amortize goodwill may impact our acquisition strategy and have an adverse effect our financial results. A shorter goodwill amortization period would increase annual amortization expense and reduce our net income over the amortization period.

We depend on the efforts of William J. Nutt, our Chairman and Chief Executive Officer, Sean M. Healey, our President and Chief Operating Officer, and our other officers. Messrs. Nutt and Healey, in particular, play an important role in identifying suitable investment opportunities for us. Messrs. Nutt and Healey do not have employment agreements with us, although each of them has a significant equity interest in us (including options subject to vesting provisions).

In addition, Essex and Tweedy, Browne, our largest two Affiliates based on revenue, depend heavily on the services of key principals, who have managed their firms for over 20 years and are primarily responsible for all investment decisions. Although each of the principals has a significant equity interest in their firm and has entered into an employment agreement with their respective firm providing for continued employment until October 2007 (in the case of Tweedy, Browne) and March 2008 (in the case of Essex), these arrangements are not a guarantee that such principals will remain with their firms until that date.

Our loss of key management personnel or our inability to attract, retain and motivate sufficient numbers of qualified management personnel may adversely affect our business. The market for investment managers is extremely competitive and is increasingly characterized by frequent movement by investment managers among different firms. In addition, because individual investment managers at our Affiliates often maintain a strong, personal relationship with their clients based on the clients' trust in individual managers, the loss of a key investment manager at an Affiliate could jeopardize the Affiliate's relationships with its clients and lead to the loss of client accounts. Losing client accounts in these circumstances could have a material adverse effect on the results of our operations and our financial condition and that of our Affiliates. Although we use a combination of economic incentives, vesting provisions, and, in some instances, non-solicitation agreements and employment agreements in an attempt to retain key management personnel, we cannot guarantee that key managers will remain with us.

Because our Affiliates offer a broad range of investment management services and utilize a number of distribution channels, changing conditions in the financial and securities markets directly affect our performance.

The financial markets and the investment management industry in general have experienced both record performance and record growth in recent years. For example, for the five years ended December 31, 1999, the S&P 500 Index appreciated at an average annual rate of 28.6%. The assets under management of mutual funds increased 24% to $6.8 trillion in 1999, the fifth consecutive year of more than 20% growth, according to the Investment Company Institute. Domestic and foreign economic conditions and general trends in business and finance, among other factors, affect the financial markets and businesses operating in the securities industry. We cannot guarantee that broader market performance will be favorable in the future. Any decline in the financial markets or a lack of sustained growth may result in a corresponding decline in our Affiliates' performance and may cause our Affiliates to experience declining assets under management and/or fees, which would reduce cash flow distributable to us.

Our Affiliates derive almost all of their revenues from investment management contracts. These contracts are typically terminable without penalty upon 60 days' notice in the case of mutual fund clients or upon 30 days' notice in the case of individual and institutional clients. As a result, our Affiliates' clients

may withdraw funds from accounts managed by the Affiliates at their election. In addition, these contracts generally provide for payment based on the market value of assets under management, although a portion also provide for payment based on investment performance. Because most of these contracts provide for payments based on market values of securities, fluctuations in securities prices will directly affect our consolidated results of operations and financial condition. Changes in our clients' investment patterns will also affect the total assets under management. Moreover, some of our Affiliates' fees are higher than those of other investment managers for similar types of investment services. The ability of each of our Affiliates to maintain its fee levels in a competitive environment depends on its ability to provide clients with investment returns and services which are satisfactory to its clients. We cannot be certain that our Affiliates will be able to retain their existing clients or to attract new clients at their current fee levels.

As noted above, investment management contracts at certain of our Affiliates provide that fees are paid on the basis of investment performance. Fees based on investment performance are inherently dependent on investment results, and therefore may vary substantially from year to year. In particular, performance-based fees have been of an unusual magnitude in recent years, and may not recur to the same magnitude in future years, if at all. In addition, while the performance-based fee contracts of our Affiliates apply to investment management services in a range of investment management styles and securities market sectors, such contracts may be concentrated in certain styles and sectors. For example, in each of 1998 and 1999 we benefited from a concentration of such products in technology sectors which performed well in those years. To the extent such contracts are concentrated within styles or sectors, they are subject to the continuing impact of fluctuating securities prices in such styles and sectors as well as the performance of the relevant Affiliates.

Because we are a holding company, we receive all of our cash from distributions made to us by our Affiliates. All of our Affiliates (other than Managers) have entered into agreements with us pursuant to which they have agreed to pay to us a specified percentage of their gross revenues on a quarterly basis. In our agreements with our Affiliates, the distributions made to us by our Affiliates represent only a portion of our Affiliates' gross revenues. Our Affiliates use the portion of their revenues not required to be distributed to us to pay their operating expenses and distributions to their management teams. The payment of distributions to us by our Affiliates may be subject to the claims of our Affiliates' creditors and to limitations applicable to our Affiliates under state laws governing corporations, partnerships and limited liability companies, state and federal regulatory requirements for the securities industry and bankruptcy and insolvency laws. As a result, we cannot guarantee that our Affiliates will always make these distributions. See "Business--Our Structure and Relationship with Affiliates--Revenue Sharing Arrangements".

When we made our original investments in our Affiliates, we agreed to purchase the additional ownership interests in each Affiliate from the owners of these interests on pre-negotiated terms which are subject to several conditions and limitations. Consequently, we may have to purchase some of these interests from time to time for cash (which we may have to borrow) or in exchange for newly issued shares of our Common Stock. These purchases may result in us having more interest expense and less net income or in our existing stockholders experiencing a dilution of their ownership of us. In addition, these purchases may result in our ownership of larger portions of our Affiliates, which may have an adverse effect on our cash flow and liquidity. See "Business--Our Structure and Relationship with Affiliates--Our Purchase of Additional Interests in Our Existing Affiliates".

Although our agreements with our Affiliates give us the authority to control some types of business activities undertaken by them and we have voting rights with respect to significant decisions, our Affiliates manage and control their own day-to-day operations, including all investment management policies and fee levels, product development, client relationships, compensation programs and compliance activities. As a result, we may not become aware, for example, of one of our Affiliates' non-compliance with a regulatory requirement as quickly as if we were involved in the day-to-day business of the Affiliate or we may not become aware of such non-compliance. In such situations, our financial condition and results of operations

may be adversely affected by problems stemming from the day-to-day operations of our Affiliates. See "Business--Government Regulation". In addition, because our Affiliates conduct their own marketing and client relations, they may from time to time compete with each other for clients. See "Business--Our Structure and Relationship with Affiliates".

Some of our existing Affiliates are partnerships of which we are the general partner. Consequently, to the extent any of these Affiliates incurs liabilities or expenses which exceed its ability to pay for them, we are liable for their payment. In addition, with respect to all of our Affiliates we may be held liable in some circumstances as a control person for their acts as well as those of their employees. We and our Affiliates maintain errors and omissions and general liability insurance in amounts which we and they believe to be adequate to cover many potential liabilities. We cannot be certain, however, that we will not have claims which exceed the limits of our available insurance coverage, that our insurers will remain solvent and will meet their obligations to provide coverage, or that insurance coverage will continue to be available to us with sufficient limits or at a reasonable cost. A judgment against us or any of our Affiliates in excess of our available coverage could have a material adverse effect on us.

We are an asset management holding company which invests in mid-sized investment management firms. The market for partial or total acquisitions of interests in investment management firms is highly competitive. We have several competitors which are also set up as holding companies and invest in or buy investment management firms. In addition, many other public and private companies, including commercial and investment banks, insurance companies and investment management firms, most of which have longer operating histories and significantly greater resources than us, invest in or buy investment management firms. Moreover, some of our principal stockholders also invest in or buy investment management firms and may compete with us as we pursue additional investments. We cannot guarantee that we will be able to compete effectively with such competitors, that new competitors will not enter the market or that such competition will not make it more difficult or impracticable for us to make new investments in investment management firms.

The investment management business is also highly competitive. Our Affiliates compete with a broad range of investment managers, including public and private investment advisers as well as firms associated with securities broker-dealers, banks, insurance companies and other entities. From time to time, our Affiliates may also compete with each other for clients. Many of our Affiliates' competitors have greater resources than do we and our Affiliates. In addition to competing directly for clients, competition may reduce the fees that our Affiliates can obtain for their services. We believe that each Affiliate's ability to compete effectively with other firms is dependent upon the Affiliate's products, level of investment performance and client service, as well as the marketing and distribution of its investment products. We cannot be certain that our Affiliates will be able to achieve favorable investment performance and retain their existing clients.

Some of our Affiliates operate or advise clients outside of the United States. Furthermore, in the future we may invest in investment management firms which operate or advise clients outside of the United States and our existing Affiliates may expand their non-U.S. operations. Our Affiliates take risks inherent in doing business internationally, such as changes in applicable laws and regulatory requirements, difficulties in staffing and managing foreign operations, longer payment cycles, difficulties in collecting investment advisory fees receivable, political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences. We cannot be certain that one or more of these risks will not have an adverse effect on our Affiliates, including investment management firms in which we may invest in the future, and, consequently, on our consolidated business, financial condition and results of operations.

Many aspects of our Affiliates' businesses are subject to extensive regulation by various U.S. federal regulatory authorities, certain state regulatory authorities, and non-U.S. regulatory authorities. There is no assurance that our Affiliates will fulfill all applicable regulatory requirements. The failure of any Affiliate

to meet regulatory requirements could subject such Affiliate to sanctions which might materially impact the Affiliate's business and our business. For further information concerning the regulations to which we and our Affiliates are subject, see "Business--Government Regulation".

Several provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated By-laws and Delaware law may, together or separately, prevent a transaction which is beneficial to our stockholders from occurring. These provisions may discourage potential purchasers from presenting acquisition proposals, delay or prevent potential purchasers from acquiring a controlling interest in us, block the removal of incumbent directors or limit the price that potential purchasers might be willing to pay in the future for shares of our Common Stock. These provisions include the issuance, without further stockholder approval, of preferred stock with rights and privileges which could be senior to the Common Stock. We are also subject to Section 203 of the Delaware General Corporation Law which, subject to a few exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder.

We have never declared or paid a cash dividend on our Common Stock. We intend to retain earnings to repay debt and to finance the growth and development of our business and do not anticipate paying cash dividends on our Common Stock in the foreseeable future. Any declaration of cash dividends in the future will depend, among other things, upon our results of operations, financial condition and capital requirements as well as general business conditions. Our credit facility also contains restrictions which prohibit us from making dividend payments to our stockholders. See "Market for Registrant's Common Equity and Related Stockholder Matters".

The market price of our Common Stock has historically experienced and may continue to experience high volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our Common Stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our Common Stock.

If our stockholders sell substantial amounts of our Common Stock (including shares issued upon the exercise of outstanding options) in the public market, the market price of our Common Stock could fall. Such sales may also make it more difficult for us to sell equity or equity-related securities in the public market in the future at a time and at a price that we deem appropriate.

In addition, we have registered for resale the 3,250,000 shares of our Common Stock reserved for issuance under our stock plans. As of December 31, 1999, options to purchase 2,015,250 shares of our Common Stock were outstanding and will be eligible for sale in the public market from time to time subject to vesting. The possible sale of a significant number of these shares may cause the price of our Common Stock to fall.

In addition, the holders of certain shares of our Common Stock have the right in some circumstances to require us to register their shares under the Securities Act of 1933, as amended (the "Securities Act") for resale to the public, while those holders as well as others have the right to include their shares in any registration statement filed by us.

In addition, some of the managers of our Affiliates have the right under some circumstances to exchange portions of their interests in our Affiliates for shares of our Common Stock. Some of these managers also have the right to include these shares in a registration statement filed by us under the Securities Act. By exercising their registration rights and causing a large number of shares to be sold in the public market, these holders may cause the price of our Common Stock to fall. In addition, any demand to

include shares in our registration statements could have an adverse effect on our ability to raise needed capital.

We and our Affiliates transitioned into the Year 2000 without material disruption to or adverse effect on our businesses. While our Year 2000 related remediation efforts are complete, we cannot guarantee that additional Year 2000 issues will not arise (either within our operations or associated with third party service providers).