Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

         When used in this Quarterly Report on Form 10-Q, in our other filings with the Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among others, the following:

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our performance is directly affected by changing conditions in the financial markets generally and in the equity markets particularly, and a decline or a lack of sustained growth in these markets may result in decreased advisory fees or performance fees and a corresponding decline (or lack of growth) in the cash flow distributable to us from our Affiliates and our operating results;



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we cannot be certain that we will be successful in finding or investing in additional investment management firms on favorable terms, that we will be able to consummate announced investments in new investment management firms, or that existing and new Affiliates will have favorable operating results;



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we may need to raise capital by making long-term or short-term borrowings or by selling shares of our stock or other securities in order to finance investments in additional investment management firms or additional investments in our existing Affiliates, and we cannot be sure that such capital will be available to us on acceptable terms, if at all; and



•

those certain other factors discussed under the caption "Business-Cautionary Statements" in our Annual Report on Form 10-K for the year ended December 31, 2003, and in any other filings we make with the Securities and Exchange Commission from time to time.

         These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

Overview

        We are an asset management company with equity investments in a diverse group of mid-sized investment management firms (our "Affiliates"). As of March 31, 2004, our affiliated investment management firms managed approximately $94.8 billion in assets across a broad range of investment styles and in three principal distribution channels: Mutual Fund, Institutional and High Net Worth. We pursue a growth strategy designed to generate shareholder value through the internal growth of our existing businesses across these three channels, in addition to investments in mid-sized investment management firms and strategic transactions and relationships designed to enhance our Affiliates' businesses and growth prospects.

        Through our Affiliates, we provide more than 150 investment products across a wide variety of asset classes and investment styles in our three principal distribution channels. We believe that our diversification across asset classes, investment styles and distribution channels helps to mitigate our exposure to the risks created by changing market environments. The following summarizes our operations in our three principal distribution channels.

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Our Affiliates provide advisory or sub-advisory services to more than 50 mutual funds. These funds are distributed to retail and institutional clients directly and through intermediaries,

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including independent investment advisors, retirement plan sponsors, broker-dealers, major fund marketplaces and bank trust departments.

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Through our Affiliates, we offer more than 75 investment products across more than 25 different investment styles in the Institutional distribution channel, including small, small/mid, mid and large capitalization value and growth equity. In addition, our Affiliates offer fixed income and specialty products. Through this distribution channel, our Affiliates manage assets for foundations and endowments, defined benefit and defined contribution plans for corporations and municipalities, and Taft-Hartley plans, with disciplined and focused investment styles that address the specialized needs of institutional clients.



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The High Net Worth distribution channel is comprised broadly of two principal client groups. The first group consists principally of direct relationships with ultra high net worth and affluent individuals and families and charitable foundations. For these clients, our Affiliates provide investment management or customized investment counseling and fiduciary services. The second group consists of individual managed account client relationships established through intermediaries, generally brokerage firms or other sponsors. Our Affiliates provide investment management services through more than 90 managed account programs.

        While we operate our business through our Affiliates in our three principal distribution channels, we strive to maintain each Affiliate's distinct entrepreneurial culture and independence through our investment structure. Our principal investment structure involves the ownership of a majority interest in our Affiliates, with each Affiliate organized as a separate firm. Each Affiliate operating agreement is tailored to meet that Affiliate's particular characteristics and to enable us to cause or prevent certain actions to protect our interests.

        We have revenue sharing arrangements with most of our Affiliates. Under these arrangements, a percentage of revenue (or in certain cases different percentages relating to the various sources or amounts of revenue of a particular Affiliate) is allocated for use by management of that Affiliate in paying operating expenses of the Affiliate, including salaries and bonuses. We call this the "Operating Allocation." The remaining portion of the Affiliate's revenue is allocated to the owners of that Affiliate (including us), and called the "Owners' Allocation." Each Affiliate distributes its Owners' Allocation to its managers and to us generally in proportion to their and our respective ownership interests in that Affiliate.

        We only agree to a particular revenue sharing arrangement if we believe that the Operating Allocation will cover operating expenses of the Affiliate, including a potential increase in expenses or decrease in revenue without a corresponding decrease in operating expenses. To the extent that we are unable to anticipate changes in the revenue and expense base of an Affiliate, the agreed-upon Operating Allocation may not be large enough to pay for all of the Affiliate's operating expenses. The allocations and distributions of cash to us under the Owners' Allocation generally have priority over the allocations and distributions to the Affiliate's managers, which help to protect us if there are any expenses in excess of the Operating Allocation of the Affiliate. Thus, if an Affiliate's expenses exceed its Operating Allocation, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers 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 managers. Nevertheless, we may agree to adjustments to revenue sharing arrangements to accommodate our business needs or those of our Affiliates, including deferring or foregoing the receipt of some portion or all of our share of an Affiliate's revenue to permit the Affiliate to fund operating expenses or restructuring our relationship with an Affiliate, if we believe that doing so will maximize the long-term benefits to us. In addition, a revenue sharing arrangement may be modified to a profit-based arrangement (as described below) to better accommodate our business needs or those of our Affiliates.

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

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to participate in the growth of their firm's revenue, which may increase their compensation from the Operating Allocation and their distributions from the Owners' Allocation; and



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to control operating expenses, thereby increasing the portion of the Operating Allocation available for growth initiatives and compensation.

        An Affiliate's managers therefore have incentives to increase revenue (thereby increasing the Operating Allocation and their share of the Owners' Allocation) and to control expenses (thereby increasing the amount of Operating Allocation available for their compensation). For the quarter ended March 31, 2004, approximately $24.2 million was reported as compensation to our Affiliate managers from their respective Operating Allocations. Additionally, during this period we allocated approximately $25.4 million of Affiliates' profits to their managers (referred to on our income statement as "minority interest").

        Some of our Affiliates are not subject to a revenue sharing arrangement, but instead operate on a profit-based model similar to a wholly-owned subsidiary. In our profit-based Affiliates, we participate in a budgeting process with the Affiliate and receive as cash flow a share of its profits. As a result, we participate fully in any increase or decrease in the revenue or expenses of such firms. In those cases, we generally provide incentives to management through compensation arrangements based on the performance of the Affiliate. In recent periods, approximately 10% of our earnings has been generated by our profit-based Affiliates.

        Net Income on our income statement reflects the consolidation of substantially all of the revenue of our Affiliates, reduced by:

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the operating expenses of our Affiliates;



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our operating expenses (i.e., our holding company expenses, including interest, amortization, income taxes and compensation for our employees); and



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the profits allocated to our Affiliates' managers, or minority interest.

        As discussed above, for Affiliates with revenue sharing arrangements, the operating expenses of the Affiliate as well as its managers' minority interest generally increase (or decrease) as the Affiliate's revenue increases (or decreases) because of the direct relationship established in many of our agreements between the Affiliate's revenue and its Operating Allocation and Owners' Allocation. At our profit-based Affiliates, expenses may or may not correspond to increases or decreases in the Affiliates' revenues.

        Our level of profitability will depend on a variety of factors, including:

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those affecting the financial markets generally and the equity markets particularly, which could potentially result in considerable increases or decreases in the assets under management at our Affiliates;



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the level of Affiliate revenue, which is dependent on the ability of our existing and future Affiliates to maintain or increase assets under management by maintaining their existing investment advisory relationships and fee structures, marketing their services successfully to new clients and obtaining favorable investment results;



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our receipt of Owners' Allocation from Affiliates with revenue sharing arrangements, which depends on the ability of our existing and future Affiliates to maintain certain levels of operating profit margins;

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the increases or decreases in the revenue and expenses of Affiliates that operate on a profit-based model;



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the availability and cost of capital with which we finance our existing and new investments;



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our success in making new investments and the terms upon which such transactions are completed;



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the level of intangible assets and the associated amortization expense resulting from our investments;



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the level of expenses incurred for holding company operations, including compensation for our employees; and



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the level of taxation to which we are subject.

        Through our affiliated investment management firms, we derive most of our revenue from the provision of investment management services. Investment management fees ("asset-based fees") are usually determined as a percentage fee charged on periodic values of a client's assets under management. Certain clients are billed for all or a portion of their accounts based upon assets under management valued at the beginning of a billing period ("in advance"). Other clients are billed for all or a portion of their accounts based upon assets under management valued at the end of the billing period ("in arrears"). For example, most client accounts in the High Net Worth distribution channel are billed in advance, and most client accounts in the Institutional distribution channel are billed in arrears. Clients in the Mutual Fund distribution channel are billed based upon average daily assets under management. Advisory fees billed in advance will not reflect subsequent changes in the market value of assets under management for that period. Conversely, advisory fees billed in arrears will reflect changes in the market value of assets under management for that period. In addition, in the High Net Worth and Institutional distribution channels, certain clients are billed on the basis of investment performance ("performance fees"). Performance fees are inherently dependent on investment results and therefore may vary substantially from period to period.

        Principally, our assets under management are directly managed by our Affiliates. One of our Affiliates also manages assets in the Institutional distribution channel using an overlay strategy. Overlay assets (assets that are managed subject to strategies which employ futures, options or other derivative securities) generate asset-based fees that are typically substantially lower than the asset-based fees generated by our Affiliates' other investment strategies. Therefore, changes in directly managed assets generally have a greater impact on our revenue from asset-based fees than changes in total assets under management (a figure which includes overlay assets).

        In addition to the revenue derived from providing investment management services, we derive a small portion of our revenue from transaction-based brokerage fees and distribution fees at certain Affiliates. In the case of the transaction-based brokerage business at Third Avenue Management LLC ("Third Avenue"), our percentage participation in Third Avenue's brokerage fee revenue is substantially less than our percentage participation in the investment management fee revenue realized by Third Avenue and our other Affiliates. For this reason, increases or decreases in our consolidated revenue that are attributable to Third Avenue brokerage fees will not affect our earnings in the same manner as investment management services revenue from Third Avenue and our other Affiliates.

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(1)

Through our Affiliate, The Managers Funds LLC, we acquired the mutual fund business of 40/86 Advisors, Inc. (previously Conseco Capital Management, Inc.) on March 31, 2004.

        The operating segment analysis presented in the following table is based on average assets under management. For the Mutual Fund distribution channel, average assets under management represents an average of the daily net assets under management. For the Institutional and High Net Worth distribution channels, average assets under management represents an average of the assets at the beginning and end of each calendar quarter during the applicable period. We believe that this analysis

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more closely correlates to the billing cycle of each distribution channel and, as such, provides a more meaningful relationship to revenue.

(1)

Note 11 to our Consolidated Financial Statements describes the basis of presentation of the financial results of our three operating segments.

(2)

EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. As a measure of liquidity, we believe that EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. EBITDA is not a measure of liquidity under generally accepted accounting principles and should not be considered an alternative to cash flow from operations. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. Our use of EBITDA, including a reconciliation to cash flow from operations, is described in greater detail in "Liquidity and Capital Resources." For purposes of our distribution channel operating results, holding company expenses have been allocated based on the proportion of aggregate cash flow distributions reported by each Affiliate in the particular distribution channel.

Revenue

        Our revenue is generally determined by the following factors:

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our assets under management (including increases or decreases relating to new investments, net client cash flows or changes in the value of assets that are attributable to fluctuations in the equity markets);



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the portion of our assets across the three operating segments and our Affiliates, which realize different fee rates;



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the portion of our directly managed and overlay assets, which realize different fee rates;



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the recognition of any performance fees; and

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the level of transaction-based brokerage fees.

        In addition, the billing patterns of our Affiliates will have an impact on revenue in cases of rising or falling markets. As described previously, advisory fees billed in advance will not reflect subsequent changes in the market value of assets under management for that period, while advisory fees billed in arrears will reflect changes in the market value of assets under management for that period. As a consequence, when equity market declines result in decreased assets under management in a particular period, revenue reported on accounts that are billed in advance of that period may appear to have a relatively higher quarterly fee rate, and in the case of equity market appreciation, revenue reported on accounts that are billed in advance of that period may appear to have a relatively lower quarterly fee rate.

        Our revenue increased 38% in the quarter ended March 31, 2004, as compared to the quarter ended March 31, 2003, primarily as a result of an increase in average assets under management. This increase in average assets under management resulted principally from positive investment performance in the twelve months ended March 31, 2004, and, to a lesser extent, positive net client cash flows. Further contributing to the growth in revenue were higher performance fees in the quarter ended March 31, 2004, as compared to the quarter ended March 31, 2003.

        The following discusses the changes in our revenue by operating segments.

Mutual Fund Distribution Channel

        The increase in revenue of 46% in the Mutual Fund distribution channel in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, resulted primarily from an increase in average assets under management. This increase in average assets under management resulted principally from positive investment performance in the twelve months ended March 31, 2004, and, to a lesser extent, positive net client cash flows. The increase in revenue was proportionately less than the growth in average assets under management because of a relative increase in assets under management that realize lower fees.

Institutional Distribution Channel

        The increase in revenue of 50% in the Institutional distribution channel in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, resulted primarily from an increase in average assets under management. This increase in average assets under management resulted principally from positive investment performance in the twelve months ended March 31, 2004, and, to a lesser extent, positive net client cash flows. Unrelated to the increase in assets under management, revenue also increased as a result of an increase in performance fees.

High Net Worth Distribution Channel

        The increase in revenue of 13% in the High Net Worth distribution channel in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, resulted primarily from an increase in average assets under management. The increase in average assets under management was primarily attributable to positive investment performance in the twelve months ended March 31, 2004, partially offset by net client cash outflows.

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        A substantial portion of our operating expenses is incurred by our Affiliates, and a substantial majority of Affiliate expenses is incurred by Affiliates with revenue sharing arrangements. For Affiliates with revenue sharing arrangements, an Affiliate's Operating Allocation percentage generally determines its operating expenses. Most notably, our compensation expenses are generally impacted by increases or decreases in each Affiliate's revenue and the corresponding increases or decreases in their respective aggregate Operating Allocations. During the quarter ended March 31, 2004, approximately $24.2 million, or about 42% of our consolidated compensation expense, was attributable to compensation allocated to our Affiliate managers from their respective Operating Allocations. As described previously, the percentage of revenue allocated to operating expenses varies from one Affiliate to another and can vary within an Affiliate depending on the source or amounts of revenue. As a result, changes in our aggregate revenue may not impact our consolidated operating expenses to the same degree. In addition, we participate fully in any increase or decrease in revenue and expenses at our profit-based Affiliates.

        Compensation and related expenses increased 46% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. The increase in compensation and related expenses reflects the relationship between revenue and operating expenses at Affiliates with revenue sharing arrangements, which experienced aggregate increases in revenue, and accordingly, reported higher compensation expense. The increase was also related to higher holding company compensation.

        Selling, general and administrative expenses increased 19% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. The increase was principally attributable to higher sub-advisory and distribution expenses resulting from the growth in assets under management at The Managers Funds LLC, as well as increases in professional fees incurred at the holding company.

        Amortization of intangible assets increased 3% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, principally from an increase in definite-lived intangible assets resulting from our purchases of additional interests in existing Affiliates during 2003.

        Other operating expenses decreased 5% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, principally as a result of a net decrease in spending by Affiliates on various smaller items.

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        Minority interest increased 56% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, principally as a result of the previously discussed increase in revenue. Given the relative decrease in investment spending by certain Affiliates from their Owners' Allocation (which has the corresponding effect of increasing minority interest), the increase in minority interest was proportionately greater than the 38% increase in revenue. Additionally, this increase was attributable to an increase in revenue at profit-based Affiliates, at which increases (or decreases) in revenue do not result in proportionate increases (or decreases) in operating expenses or minority interest.

        Income taxes increased by 45% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. This increase is attributable to the increase in income before taxes, as well as the increase in our effective tax rate from 40% in the three months ended March 31, 2003 to 41% in the three months ended March 31, 2004.

        Interest expense increased 35% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. The increase is principally attributable to our issuance of $300 million of mandatory convertible securities in February 2004, which we refer to as the "2004 PRIDES" (as described in greater detail in "Liquidity and Capital Resources").

        Investment and other income increased 27% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. The increase was attributable to the maintenance of higher levels of excess cash at the holding company following our issuance of the 2004 PRIDES, as discussed above.

        The 40% increase in Net Income in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, resulted principally from the increases in revenue and investment and other income, partially offset by increases in reported operating, interest, minority interest and tax expenses, as described above.

Supplemental Performance Measure

        As supplemental information, we provide a non-GAAP performance measure that we refer to as Cash Net Income. This measure is provided in addition to, but not as a substitute for, Net Income. Cash Net Income is defined as Net Income plus amortization and deferred taxes related to intangible

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assets plus Affiliate depreciation. We consider Cash Net Income an important measure of our financial performance, as we believe it best represents operating performance before non-cash expenses relating to our acquisition of interests in our Affiliates. Cash Net Income is used by our management and Board of Directors as a principal performance benchmark, including as a measure for aligning executive compensation with stockholder value.

        Since our acquired assets do not generally depreciate or require replacement by AMG, and since they generate deferred tax expenses that are unlikely to reverse, we add back these non-cash expenses to Net Income to measure operating performance. We add back amortization attributable to acquired client relationships because this expense does not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) that we no longer amortize but which continues to generate tax deductions is added back, because these accruals would be used only in the event of a future sale of an Affiliate or an impairment charge, which we consider unlikely. We add back the portion of consolidated depreciation expense incurred by our Affiliates because under our Affiliates' operating agreements we are generally not required to replenish these depreciating assets. Conversely, we do not add back the deferred taxes relating to our floating rate senior convertible securities or other depreciation expenses.

        The following table provides a reconciliation of Net Income to Cash Net Income:

        Cash Net Income increased 23% in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, primarily as a result of the previously described factors affecting Net Income.

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(1)

The definition of EBITDA is presented in Note 2 on page 19.

        We have met our cash requirements primarily through cash generated by operating activities and the issuance of convertible debt securities. Our principal uses of cash in the quarter ended March 31, 2004 were to repurchase shares of our common stock and make distributions to Affiliate managers. We expect that our principal uses of cash for the foreseeable future will be for investments in new and existing Affiliates, distributions to Affiliate managers, payment of principal and interest on outstanding debt, the repurchase of debt securities, the repurchase of shares of our common stock and for working capital purposes.

        We view our ratio of debt to EBITDA (our "leverage ratio") as an important gauge of our ability to service debt, make new investments and access capital. Consistent with industry practice, we do not consider our mandatory convertible securities as debt for the purpose of determining our leverage ratio. As more fully discussed below, each unit of our 2001 PRIDES and 2004 PRIDES is comprised of a senior note and a forward purchase contract. Under the terms of each security, the exercise of the forward purchase contracts at the respective remarketing dates will result in the issuance of shares of our common stock that will generate cash proceeds sufficient to amortize debt in an amount equal to the remaining note portion of each security. We also view our leverage on a "net debt" basis by deducting our cash and cash equivalents from our debt balance. The leverage covenant of our senior revolving credit facility is generally consistent with our treatment of the PRIDES securities and our net debt approach. At March 31, 2004, our leverage ratio was 0.4:1.

Senior Revolving Credit Facility

        We have a $250 million senior revolving credit facility (the "Facility") with several major commercial banks. The Facility, which is scheduled to mature in August 2005, currently provides that we may borrow at rates of interest (based either on the Eurodollar rate or the Prime rate as in effect from time to time) that vary depending on our credit ratings. Subject to the agreement of the lenders (or prospective lenders) to increase their commitments, we have the option to increase the Facility to $350 million. The Facility contains financial covenants with respect to net worth, leverage and interest coverage, and requires us to pay a quarterly commitment fee on any unused portion. The Facility also

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contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Any borrowings under the Facility would be collateralized by pledges of all capital stock or other equity interests owned by us.

Zero Coupon Senior Convertible Notes

        In May 2001, we completed a private placement of zero coupon senior convertible notes in which we sold an aggregate of $251 million principal amount at maturity of zero coupon senior convertible notes due 2021, accreting at a rate of 0.50% per year. Each $1,000 principal amount at maturity zero coupon senior convertible note is convertible into 17.429 shares of our common stock (the "settlement rate") upon the occurrence of certain events, including the following: (i) if the closing price of a share of our common stock is more than a specified price over certain periods (initially $62.36 and increasing incrementally at the end of each calendar quarter to $63.08 on April 1, 2021); (ii) if the credit rating assigned by Standard & Poor's to the securities is below BB-; or (iii) if we call the securities for redemption. The holders may require us to repurchase the securities at their accreted value on May 7 of 2006, 2011 and 2016. (Holders also had the option to require us to repurchase the securities on May 7, 2004, but no holders exercised this option.) If the holders exercise this option in the future, we may choose to pay the purchase price for such repurchases with cash, shares of our common stock or some combination thereof. We may redeem the securities for cash on or after May 7, 2006 at their accreted value. In 2003, we repurchased $116.5 million principal amount at maturity of these notes in privately negotiated transactions.

2001 Mandatory Convertible Securities

        In December 2001, we completed a public offering of mandatory convertible securities ("2001 PRIDES"). A sale of an over-allotment of the securities was completed in January 2002, increasing the aggregate amount outstanding to $230 million. As described below, these securities are structured to provide $230 million in additional proceeds to us following a remarketing and the exercise of forward purchase contracts in November 2004.

        Each unit of the 2001 PRIDES initially consists of (i) a senior note due November 17, 2006 with a principal amount of $25 per note, on which we pay interest quarterly at the annual rate of 6%, and (ii) a forward purchase contract pursuant to which the holder has agreed to purchase shares of our common stock on November 17, 2004, with the number of shares to be determined based upon the average trading price of our common stock for a period preceding that date. Depending on the average trading price in that period, the settlement rate will range from 0.4461 to 0.5130 shares per $25 senior note. Based on the trading price of our common stock as of March 31, 2004, the purchase contracts would have a settlement rate of 0.4580.

        Each of the senior notes is pledged to us to collateralize the holder's obligations under the forward purchase contracts. Beginning in August 2004, under the terms of the 2001 PRIDES, the senior notes will be remarketed to new investors. A successful remarketing will generate $230 million of proceeds to be used by the original holders of the 2001 PRIDES to honor their obligations on the forward purchase contracts. In exchange for the additional $230 million in payment on the forward purchase contracts, we will issue shares of our common stock to the original holders of the senior notes. As referenced above, the number of shares of common stock to be issued will be determined by the price of our common stock at that time. Assuming a successful remarketing, the senior notes will remain outstanding until November 2006.

Floating Rate Senior Convertible Securities

        In February 2003, we completed a private placement of an aggregate of $300 million of floating rate senior convertible securities. These securities bear interest at a rate equal to 3-month LIBOR

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minus 0.50%, payable in cash quarterly. Each $1,000 floating rate senior convertible security is convertible into shares of our common stock upon the occurrence of certain events, including the following: (i) if the closing price of our common stock exceeds $65.00 per share over certain periods; (ii) if the credit rating assigned to us by Standard & Poor's is below BB-; or (iii) if we call the securities for redemption. Upon conversion, the initial settlement rate will be 18.462 shares of our common stock for each $1,000 floating rate senior convertible security. In addition, if the market price of our common stock exceeds $54.17 per share at the time of conversion, holders will receive additional shares of our common stock based on the price of our common stock at that time. Based on the trading price of our common stock as of March 31, 2004, each security would have a settlement rate of 18.547 shares. The holders of the securities may require us to repurchase these securities on February 25 of 2008, 2013, 2018, 2023 and 2028, at their principal amount. We may choose to pay the purchase price for such repurchases with cash, shares of our common stock or some combination thereof. We have the option to redeem the securities for cash at any time on or after February 25, 2008 at their principal amount.

        The floating rate senior convertible securities are considered contingent payment debt instruments under federal income tax regulations. These regulations require us to deduct interest expense at the rate at which we would issue a non-contingent, non-convertible, fixed-rate debt instrument. When the implied interest rate for tax purposes is greater than the actual interest rate, a deferred tax expense is generated. While the implied interest rate for these securities is 5.62% for tax purposes, the actual rate is three-month LIBOR minus 0.50% (which equaled 0.61% as of March 31, 2004). Based on current LIBOR rates, these securities generate approximately $5.8 million of deferred taxes each year. While these deferred tax liabilities may never reverse, such liabilities will reverse if we redeem the securities on February 25, 2008 or later and if our common stock is trading at $54.17 per share or less on the date of redemption. All deferred taxes related to the securities will be reclassified to equity if the securities convert and our common stock is trading at more than $60.90 per share when it is delivered to holders.

2004 Mandatory Convertible Securities

        In February 2004, we completed a private placement of $300 million of mandatory convertible securities ("2004 PRIDES"). As described below, these securities are structured to provide $300 million of additional proceeds to us following a successful remarketing and the exercise of forward purchase contracts in February 2008.

        Each unit of the 2004 PRIDES initially consists of (i) a senior note due February 17, 2010 with a principal amount of $1,000 per note, on which we pay interest quarterly at the annual rate of 4.125%, and (ii) a forward purchase contract pursuant to which the holder has agreed to purchase shares of our common stock on February 17, 2008. Holders of the purchase contracts will receive a quarterly contract adjustment payment at the annual rate of 2.525% per $1,000 contract. The present value of the contract adjustment payments ($24 million) is recorded in additional paid-in capital, with a corresponding increase in current liabilities ($6 million) and other long-term liabilities ($18 million). The number of shares to be issued on February 17, 2008 will be determined based upon the average trading price of our common stock for a period preceding that date. Depending on the average trading price in that period, the settlement rate will range from 11.7851 to 18.0311 shares per $1,000 senior note. Based on the trading price of our common stock as of March 31, 2004, the purchase contracts would have a settlement rate of 18.0311.

        Each of the senior notes is pledged to us to collateralize the holder's obligations under the forward purchase contracts. Beginning in August 2007, under the terms of the 2004 PRIDES, the senior notes will be remarketed to new investors. A successful remarketing will generate $300 million of proceeds to be used by the original holders of the 2004 PRIDES to honor their obligations on the forward purchase contracts. In exchange for the additional $300 million in payment on the forward purchase contracts,

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we will issue shares of our common stock to the original holders of the senior notes. As referenced above, the number of shares of common stock to be issued will be determined by the market price of our common stock at that time. Assuming a successful remarketing, the senior notes will remain outstanding until at least February 2010.

        In connection with our 2004 PRIDES private placement, we repurchased an aggregate of approximately 3.5 million shares of our common stock through March 31, 2004. The share repurchases are intended to offset our obligation to issue shares of our common stock in November 2004 under the terms of the forward purchase contracts of our 2001 PRIDES.

Purchases of Affiliate Equity

        Our Affiliate operating agreements provide our Affiliate managers the conditional right to require us to purchase their retained equity interests at certain intervals. The agreements also provide us the conditional right to require Affiliate managers to sell their retained equity interests upon their death, permanent incapacity or termination of employment and provide Affiliate managers the conditional right to require us to purchase such retained equity interests upon the occurrence of such events. These purchases will occur at varying times and in varying amounts over a period of approximately 14 years; however, the actual timing and amounts of such purchases generally cannot be predicted with any certainty. These purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. As one measure of the potential magnitude of such purchases, in the event that a triggering event and resulting purchase occurred with respect to all such retained equity interests as of March 31, 2004, the aggregate amount of these payments would have totaled approximately $666.6 million. In the event that all such transactions were closed, we would own the prospective cash flow distributions of all equity interests that would be purchased from our Affiliate managers. As of March 31, 2004, this amount would represent approximately $90.5 million on an annualized basis. We pay for these purchases in cash, shares of our common stock or other forms of consideration. With our approval, Affiliate managers are also permitted to sell their equity interests to other individuals or entities. These potential purchases, combined with our other cash needs, may require more cash than is available from operations, and therefore, we may need to raise capital by making borrowings under our Facility, by selling shares of our common stock or other equity or debt securities, or to otherwise refinance a portion of these purchases.

Operating Cash Flow

        Cash flow from operations generally represents net income plus non-cash charges for amortization, deferred taxes and depreciation, as well as the changes in our consolidated working capital. The increase in cash flow from operations in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, resulted principally from the growth in revenue and earnings in the first quarter of 2004 as compared to the same period in 2003. This increase was also attributable to tax benefits realized from the exercise of stock options during the first quarter of 2004.

Supplemental Liquidity Measure

        As supplemental information in this Quarterly Report on Form 10-Q, we have provided information regarding our EBITDA, a non-GAAP liquidity measure. This measure is provided in addition to, but not as a substitute for, cash flow from operations. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. As a measure of liquidity, we believe that EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. We further believe that many investors use this information when analyzing the financial position of companies in the investment management industry.

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        The following table provides a reconciliation of cash flow from operations to EBITDA:

Investing Cash Flow

        The increase in net cash flow used in investing activities resulted primarily from investments in marketable securities. Net cash flow used to make investments in existing Affiliates was $3.1 million and $4.1 million for the three months ended March 31, 2003 and 2004, respectively.

        In January 2004, we entered into a definitive agreement with Genesis Holdings International ("Genesis") to acquire a 60% equity interest in the operating business of Genesis. The management partners of Genesis will hold the remaining equity interests and continue to direct its day-to-day operations. Genesis, with offices in London, Guernsey, Chile and Brazil, managed approximately $8.0 billion in assets as of March 31, 2004. The transaction is expected to close by the end of the second quarter and will be funded from available cash.

Financing Cash Flow

        Cash flows from financing activities decreased in the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, as a result of increased repurchase activity in the first quarter of 2004. In the three months ended March 31, 2003, we repurchased a portion of our outstanding zero coupon senior convertible notes for $101.3 million and common stock for $33.7 million, while in the quarter ended March 31, 2004, we repurchased common stock for $194.3 million. During the quarter ended March 31, 2004, we repurchased approximately 3.5 million shares of our common stock at an average price of $55.73 per share under share repurchase programs authorized by our Board of Directors. As of March 31, 2004, approximately 3.0 million shares remain authorized for repurchase.

        During the three months ended March 31, 2004, our principal source of cash from financing activities was the issuance of $300 million of mandatory convertible securities, while during the same period in 2003, our principal source of cash from financing activities was the issuance of $300 million of floating rate senior convertible securities.

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