Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Commission File Number 001-13459

Affiliated Managers Group, Inc.

(Exact name of registrant as specified in its charter)

600 Hale Street, Prides Crossing, Massachusetts 01965
(Address of principal executive offices)

(617) 747-3300

(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ý    No o

        There were 33,510,343 shares of the registrant's common stock outstanding as of May 6, 2005.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

The accompanying notes are an integral part of the Consolidated Financial Statements.

2

AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)

(1)

See Note 7 for the calculation of diluted earnings per share.

The accompanying notes are an integral part of the Consolidated Financial Statements.

3

AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of the Consolidated Financial Statements.

4

AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

        The consolidated financial statements of Affiliated Managers Group, Inc. ("Company" or "AMG") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. All intercompany balances and transactions have been eliminated. All dollar amounts in these notes (except information that is presented on a per share, per note or per contract basis) are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation, including the classification of auction rate securities as available-for-sale securities, which are reported as short-term investments instead of cash equivalents. These reclassifications had no impact on our results of operations or changes in stockholders' equity. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 includes additional information about AMG, its operations and its financial position, and should be read in conjunction with this Quarterly Report on Form 10-Q.

2.     Senior Debt

        The components of senior debt are as follows:

Senior Revolving Credit Facility

        The Company has a senior revolving credit facility ("Facility") with a syndicate of major commercial banks under which the Company may borrow up to $405,000 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 the Company's credit ratings. The Facility has a maturity date of August 2007; subject to the agreement of the lenders (or prospective lenders) to increase their commitments, the Company has the option to increase the Facility up to an aggregate of $450,000. The Facility contains financial covenants with respect to net worth, leverage and interest coverage. The Facility also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Facility are collateralized by pledges of all capital stock or other equity interests owned by the Company.

5

Senior Notes due 2006

        In December 2001, the Company issued $230,000 of mandatory convertible securities ("2001 PRIDES"). Each unit of the 2001 PRIDES initially consisted of (i) a senior note due November 17, 2006 with a principal amount of $25 per note, and (ii) a forward purchase contract pursuant to which the holder agreed to purchase shares of the Company's common stock on November 17, 2004, with the number of shares determined based upon the average trading price of the Company's common stock for a period preceding that date.

        Following the August 2004 repurchase of $154,250 in aggregate principal amount of the senior notes component of the 2001 PRIDES and settlement of the forward purchase contracts in November 2004, $75,750 in aggregate principal amount of the senior notes component of the 2001 PRIDES (the "Senior Notes due 2006") remain outstanding, with an interest rate of 5.41% and a maturity date of November 2006.

3.     Senior Convertible Debt

Zero Coupon Senior Convertible Notes

        In May 2001, the Company issued $251,000 of principal amount at maturity of zero coupon senior convertible notes due 2021 ("zero coupon convertible notes"), with each note issued at 90.50% of such principal amount and accreting at a rate of 0.50% per year. Following the Company's 2003 repurchase of $116,500 principal amount, $134,500 principal amount at maturity of zero coupon convertible notes remains outstanding. Each security is convertible into 17.429 shares of the Company's common stock upon the occurrence of certain events, including the following: (i) if the closing price of a share of its 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 in April 2021); (ii) if the credit rating assigned by Standard & Poor's to the securities is below BB-; or (iii) if the Company calls the securities for redemption. The holders may require the Company to repurchase the securities at their accreted value in May 2006, 2011 and 2016. If the holders exercise this option in the future, the Company may elect to repurchase the securities with cash, shares of its common stock or some combination thereof. The Company has the option to redeem the securities for cash on or after May 7, 2006 at their accreted value. Under the terms of the indenture governing the zero coupon convertible notes, through June 30, 2005 a holder may convert such security into common stock by following the conversion procedures in the indenture; the zero coupon convertible notes may cease to be convertible in the future.

Floating Rate Senior Convertible Securities

        In February 2003, the Company issued $300,000 of floating rate senior convertible securities due 2033 ("floating rate convertible securities"). The floating rate convertible securities bear interest at a rate equal to 3-month LIBOR minus 0.50%, payable in cash quarterly. Each security is convertible into shares of the Company's common stock upon the occurrence of certain events, including the following: (i) if the closing price of a share of the Company's common stock exceeds $65.00 over certain periods; (ii) if the credit rating assigned by Standard & Poor's is below BB-; or (iii) if the Company calls the securities for redemption. Upon conversion, holders of the securities will receive 18.462 shares of the

6

Company's common stock for each convertible security. In addition, if the market price of the Company's common stock exceeds $54.17 per share at the time of conversion, holders will receive additional shares of common stock based on the stock price at that time. Based on the trading price of the Company's common stock as of March 31, 2005, upon conversion a holder of each security would receive an additional 1.426 shares. The holders of the floating rate convertible securities may require the Company to repurchase such securities in February 2008, 2013, 2018, 2023 and 2028, at their principal amount. The Company may choose to pay the purchase price for such repurchases with cash, shares of its common stock or some combination thereof. The Company may redeem the convertible securities for cash at any time on or after February 25, 2008, at their principal amount.

        The Company entered into interest rate swap contracts that effectively exchange the variable interest rate for a fixed interest rate on $150,000 of the floating rate convertible securities. For the period through February 2008, the Company will pay a weighted average fixed rate of 3.3% on that notional amount.

4.     Mandatory Convertible Securities

        In February 2004, the Company issued $300,000 of mandatory convertible securities ("2004 PRIDES"). As described below, these securities are structured to provide $300,000 of additional proceeds to the Company following a successful remarketing and the exercise of forward purchase contracts in February 2008.

        Each unit of the 2004 PRIDES consists of (i) a senior note due February 2010 with a principal amount of $1,000 per note, on which the Company pays 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 the Company's common stock in February 2008. Holders of the purchase contracts receive a quarterly contract adjustment payment at the annual rate of 2.525% per $1,000 purchase contract. The current portion of the contract adjustment payments, approximately $7,000, is recorded in current liabilities. The number of shares to be issued in February 2008 will be determined based upon the average trading price of the Company's common stock for a period preceding that date. Depending on the average trading price in that period, the settlement rate will range from 11.785 to 18.031 shares per $1,000 purchase contract. Based on the trading price of the Company's common stock as of March 31, 2005, the purchase contracts would have a settlement rate of 16.121.

        Each of the senior notes is pledged to the Company 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 are expected to be remarketed to new investors. A successful remarketing will generate $300,000 of gross 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 $300,000 in payment on the forward purchase contracts, the Company will issue shares of its 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 the Company's common stock at that time. Assuming a successful remarketing, the senior notes will remain outstanding until at least February 2010.

7

5.     Income Taxes

        A summary of the provision for income taxes is as follows:

        The components of deferred tax assets and liabilities are as follows:

        Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets and convertible securities. The Company amortizes its goodwill and certain other intangible assets for tax purposes only, reducing its tax basis below carrying value for financial statement purposes. The Company's floating rate convertible securities currently generate tax deductions that are higher than the interest expense recorded for financial statement purposes.

        At March 31, 2005, the Company had state net operating loss carryforwards that will expire over the next 15-year period. The Company also has state tax credit carryforwards that will expire over the next 10-year period. The valuation allowances at December 31, 2004 and March 31, 2005 are related to the uncertainty of the realization of most of these loss and credit carryforwards. The realization of these assets depends upon the Company's generation of sufficient taxable income prior to their expiration. The change in the valuation allowance for the quarter ended March 31, 2005 is principally attributable to state net operating losses during this period.

6.     Forward Equity Sale Agreement

        In March and April 2005, the Company cancelled a forward equity sale agreement, net settling the agreement for approximately $14,000 in cash. Approximately 8% was cancelled in the three months ended March 31, 2005, with the remainder cancelled in April 2005. This payment was recorded as a reduction to stockholders' equity.

8

7.     Earnings Per Share

        The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share. Unlike all other dollar amounts in these Notes, the amounts in the numerator reconciliation are not presented in thousands.

        The calculations of diluted earnings per share for the three months ended March 31, 2004 and 2005 exclude the effect of any potential exercise of the forward purchase contract component of the 2001 and 2004 PRIDES, as applicable, because the effect would have been anti-dilutive. The Company used the treasury stock method to measure the potentially issuable shares attributable to the forward equity sale agreement in the calculation of diluted earnings per share.

        Also, as more fully discussed in Note 3, the Company had zero coupon convertible notes and floating rate convertible securities outstanding during the three months ended March 31, 2004 and 2005. These notes are convertible into shares of the Company's common stock upon certain conditions. The aggregate number of shares of common stock that could be issued in the future to settle these securities are deemed outstanding for the purposes of the calculation of earnings per share. This approach, referred to as the if-converted method, requires that such shares be deemed outstanding regardless of whether the issuance of those shares could actually be triggered. For this if-converted calculation, the interest expense (net of taxes) attributable to these securities is added back to Net Income, reflecting the assumption that the securities have been converted.

8.     Commitments and Contingencies

        The Company and its Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

9

        Certain Affiliates operate under regulatory authorities which require they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the year.

9.     Related Party Transactions

        The Company periodically records amounts payable to Affiliate partners in connection with the purchase of additional Affiliate equity interests. The total amount due to Affiliate partners as of March 31, 2005 was $21,715, of which $8,080 is due within one year and is included as a current liability.

10.   Equity-Based Compensation Plans

        Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" encourages but does not require adoption of a fair value method for equity-based compensation arrangements. An entity may continue to apply Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations, provided the entity discloses its pro forma Net Income and earnings per share as if the fair value method had been applied in measuring compensation cost.

        The Company continues to apply the intrinsic value method prescribed by APB 25 in accounting for its stock-based compensation plans. Under this method, compensation cost is measured at the grant date based on the intrinsic value of the award and is recognized over the vesting period. Had compensation cost for the Company's stock option plans been determined based on the fair value method set forth in FAS 123, Net Income and earnings per share would have been as follows:

11.   Segment Information

        Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), establishes disclosure requirements relating to operating segments in annual and interim financial statements. Management has assessed the requirements of FAS 131 and determined that the Company operates in three business segments representing the Company's three principal distribution channels: Mutual Fund, Institutional and High Net Worth, each of which has different client relationships.

        Revenue in the Mutual Fund distribution channel is earned from advisory and sub-advisory relationships with mutual funds. Revenue in the Institutional distribution channel is earned from relationships with foundations and endowments, defined benefit and defined contribution plans and Taft-Hartley plans. Revenue in the High Net Worth distribution channel is earned from relationships

10

with wealthy individuals, family trusts and managed account programs. Revenue earned from client relationships managed by Affiliates accounted for under the equity method is not consolidated with the Company's reported revenue but instead is included (net of operating expenses, including amortization) in "Investment and other income," and reported in the distribution channel in which the Affiliate operates. In the case of Affiliates with transaction-based brokerage fee businesses, revenue reported in each distribution channel includes fees earned for transactions on behalf of clients in that channel.

        In firms with revenue sharing arrangements, a certain percentage of revenue is allocated for use by management of an Affiliate in paying operating expenses of that Affiliate, including salaries and bonuses, and is called an "Operating Allocation." In reporting segment operating expenses, Affiliate expenses are allocated to a particular segment on a pro rata basis with respect to the revenue generated by that Affiliate in such segment. Generally, as revenue increases, additional compensation is typically paid to Affiliate management partners from the Operating Allocation. As a result, the contractual expense allocation pursuant to a revenue sharing arrangement may result in the characterization of any growth in profit margin beyond the Company's Owners' Allocation as an operating expense. All other operating expenses (excluding intangible amortization) and interest expense have been allocated to segments based on the proportion of cash flow distributions reported by Affiliates in each segment.

Statements of Income

11

12.   Acquisitions

        In January 2005, through Managers Investment Group LLC, the Company completed the acquisition of approximately $3.0 billion of assets under management from Fremont Investment Advisors, Inc. ("FIA"). The acquisition includes the Fremont Funds, a diversified family of 12 no-load mutual funds managed by independent sub-advisors and investment professionals at FIA, as well as FIA assets in separate accounts and 401(k) plans. The transaction was financed through available cash. The Company's purchase price allocation for this investment is subject to the finalization of the valuation of acquired client relationships. Additionally, during the three months ended March 31, 2005, the Company acquired interests in existing Affiliates which were financed principally through working capital. The effect of these investments has been included in the Consolidated Financial Statements from the date of acquisition.

        During the three months ended March 31, 2005, the Company completed the purchase price allocation for its November 2004 investment in AQR Capital Management, LLC. In accordance with the equity method of accounting, approximately $80,000 of the purchase price was allocated to acquired client relationships, with the remainder allocated principally to goodwill. These assets are classified on the Company's balance sheet within "Equity investment in Affiliate."

        The Company's operating agreements provide Affiliate management partners the conditional right to require the Company to purchase their retained equity interests at certain intervals. The agreements also provide the Company the conditional right to require Affiliate management partners to sell their retained equity interests upon their death, permanent incapacity or termination of employment and provide such partners the conditional right to require the Company to purchase such retained equity interests upon the occurrence of such events. With the Company's approval, partners are also permitted to sell their equity interests to other individuals or entities. These purchases are generally calculated

12

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, 2005, the aggregate amount of these payments would have totaled approximately $734,501. In the event that all such transactions were closed, the Company would own the cash flow distributions attributable to the additional equity interests purchased from Affiliate management partners. As of March 31, 2005, this amount would represent approximately $103,812 on an annualized basis.

        In connection with the Company's investments in certain Affiliates, in the event specified financial targets are achieved at such Affiliates, the Company would be required to make additional payments of approximately $178,000. Payments under these arrangements, if required, are not expected to exceed $10,000 for the twelve-month period ended March 31, 2006. If these payments occur, they will be recorded as goodwill.

13.   Goodwill and Acquired Client Relationships

        During the three months ended March 31, 2005, the Company completed its acquisition of the FIA assets under management and repurchased certain interests from Affiliate management. In this period, the Company also issued Affiliate equity interests to certain employees. The following table presents the change in goodwill associated with such transactions net of these transferred and repurchased interests. All goodwill acquired during this period is deductible for tax purposes.

        The following table reflects the components of intangible assets of majority-owned investments as of December 31, 2004 and March 31, 2005:

        For the Company's majority-owned investments, definite-lived acquired client relationships are amortized using the straight-line method over a weighted average life of approximately 12 years. Amortization expense was $4,101 and $5,736 for the three months ended March 31, 2004 and 2005, respectively. The Company estimates that amortization expense will be approximately $23,000 for the next 5 years, assuming no additional investments in new or existing Affiliates.

        The definite-lived acquired client relationships attributable to the Company's equity method investment in AQR are amortized using the straight-line method over approximately 10 years. Amortization expense was zero and $1,998 for the three months ended March 31, 2004 and 2005, respectively. The Company estimates that AQR amortization expense will be approximately $7,990 per year through 2014.

13

        As a result of the issuance of Affiliate equity interests to certain employees, the Company's Affiliate ownership percentage in those Affiliates decreased. Accordingly, goodwill and acquired client relationships decreased by approximately $4,700.

14.   Recent Accounting Developments

        In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS No. 123 ("FAS 123(R)"), requiring the measurement of the cost of all employee share-based payments (including stock option awards) in financial statements using a fair-value based method. The Company is required to adopt FAS 123(R) in the first quarter of 2006. Although the Company continues to assess the impact of the adoption of FAS 123(R), the adoption is not expected to have a material impact on its Consolidated Statement of Income.

        In March 2005, the Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF Issue No. 04-05 ("EITF 04-05"), which provides a new framework for addressing when a general partner in a limited partnership controls the partnership. The EITF directed the FASB staff to seek public comment on the impact of EITF 04-05, which will then be considered by the EITF in reaching its final consensus. Depending on the EITF's determinations, the Company's Affiliates may be required to consolidate certain investment partnerships in which they hold a general partner interest.

15.   Subsequent Event

        On April 19, 2005, the Company entered into a definitive agreement to acquire First Asset Management Inc., a privately held Canadian asset management holding company, for approximately $250,000 (approximately 90% of which is expected to be paid in cash and the remainder with shares of the Company's common stock). Upon the closing of this investment, the Company will own equity interests in six Canadian asset management firms: Foyston, Gordon & Payne Inc.; Beutel, Goodman & Company Ltd.; Montrusco Bolton Investment Inc.; Deans Knight Capital Management Ltd.; Triax Capital Corporation; and Covington Capital Corporation. Together, these investment management firms manage approximately $23 billion through approximately 100 investment products, including Canadian, U.S. and international value and growth equity products, as well as balanced, fixed income and venture capital products. Based in Toronto, Montreal, and Vancouver, these firms serve a wide range of institutional investors and high net worth individuals throughout the Canadian marketplace. This transaction is expected to close in the third quarter of 2005, subject to transaction-related closing conditions, including regulatory approvals.

14

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:

•

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 our operating results and in the cash flow distributable to us from our Affiliates;



•

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;



•

we may need to raise capital by making long-term or short-term borrowings or by selling shares of our common 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, 2004, 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"). Pro forma for our pending acquisition of First Asset Management Inc., as of March 31, 2005 our affiliated investment management firms managed approximately $155 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 business 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 175 investment products across a broad range 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.

15

•

Our Affiliates provide advisory or sub-advisory services to more than 50 domestic and offshore mutual funds. These funds are distributed to retail and institutional clients directly and through intermediaries, including independent investment advisors, retirement plan sponsors, broker-dealers, major fund marketplaces and bank trust departments.



•

Through our Affiliates, we offer more than 100 investment products across more than 30 different investment styles in the Institutional distribution channel, including small, small/mid, mid and large capitalization value and growth equity and emerging markets. In addition, our Affiliates offer quantitative, alternative and fixed income 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.



•

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.

        Since December 31, 2003, we completed Affiliate investments in Genesis Fund Managers, LLP ("Genesis"), AQR Capital Management, LLC ("AQR") and TimesSquare Capital Management, LLC ("TimesSquare"), as well as an additional investment in Friess Associates, LLC and our acquisition of the assets of Fremont Investment Advisors, Inc.

        In June 2004, we completed the acquisition of a 60 percent interest in Genesis, a manager of emerging markets equity securities with operations in London, Chile and Guernsey. Founded in 1989, Genesis employs a bottom-up research and stock selection process and seeks capital growth while limiting country risk through geographic diversification. Genesis manages approximately $11 billion in assets in separate accounts, commingled portfolios and closed-end funds for institutional clients in the U.S., Europe and Australia.

        In November 2004, we completed the acquisition of a significant minority interest in AQR. Greenwich, Connecticut-based AQR is a quantitatively focused firm with approximately $13 billion in assets under management, over half of which are in its hedge fund products. AQR serves more than 500 clients with its quantitative hedge fund and long-only international equity products provided through collective investment vehicles and separate accounts.

        In November 2004, we also completed our investment in the equity business of New York-based TimesSquare Capital Management, an investment manager of small- and mid-cap growth products. TimesSquare's equity investment team manages approximately $5.5 billion on behalf of approximately 100 institutional clients, including public and corporate pension funds, endowments and foundations, and Taft-Hartley retirement plans.

        In January 2005, we completed the formation of Managers Investment Group LLC ("Managers" or "Managers Investment Group," the successor to The Managers Funds LLC), a distribution platform designed to expand our Affiliates' product offerings and distribution capabilities by leveraging our product development, packaging, sales and support expertise. Managers operates as a single point of contact for retail intermediaries, offering more than 75 Affiliate products to mutual fund and separate account investors through banks, brokerage firms, insurance companies, and other sponsored platforms such as defined contribution plans. Managers has offices located throughout the United States, and is supported by a broad and experienced marketing and wholesaling teams, which includes a significant

16

external and internal sales force dedicated to providing sales and client services support. Also in January 2005, through Managers, we completed the acquisition of approximately $3.0 billion of assets under management from Fremont Investment Advisors, Inc. ("FIA"). The acquisition includes the Fremont Funds, a diversified family of 12 no-load mutual funds managed by independent sub-advisors and investment professionals at FIA as well as FIA assets in separate accounts and 401(k) plans.

        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 portion of the Affiliate's revenue that is allocated to the owners of that Affiliate (including us) is called the "Owners' Allocation." Each Affiliate allocates its Owners' Allocation to its managers and to us generally in proportion to their and our respective ownership interests in that Affiliate. Where we hold a minority equity interest, our revenue sharing arrangement does not include an Operating Allocation or Owners' Allocation. In these cases, we are generally allocated a percentage of the Affiliate's revenue with the balance to be used to pay operating expenses and profit distributions to the other owners.

        We agree to a particular revenue sharing arrangement if we believe that the Operating Allocation will cover operating expenses of the Affiliate, including in the event of a potential increase in expenses or a 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 helps 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 accommodate better our business needs or those of our Affiliates.

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

•

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



•

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

17

        For the three months ended March 31, 2005, approximately $37.6 million was reported as compensation to our Affiliate managers. Additionally, during this period we allocated approximately $29.4 million of our 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 these cases, we generally provide incentives to management through compensation arrangements based on the performance of the Affiliate. In recent periods, approximately 15% of our earnings has been generated through our profit-based arrangements.

        Net Income on our income statement reflects the revenue of our majority-owned Affiliates and our share of income from Affiliates in which we own a minority equity interest, reduced by:

•

the operating expenses of our majority-owned Affiliates;



•

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



•

the profits allocated to managers of our majority-owned Affiliates (i.e. 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:

•

those affecting the global 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;



•

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;



•

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;



•

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



•

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



•

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



•

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



•

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

18

•

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; most asset-based advisory fees are billed by our Affiliates quarterly. 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"). 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 certain cases, including our investment in AQR, we are required to use the equity method of accounting. Consistent with this method, we have not consolidated AQR's operating results (including its revenue) in our income statement. Our share of AQR's profits (net of operating expenses, including intangible amortization) is reported in "Investment and other income," and is therefore reflected in our Net Income and EBITDA. As a consequence, increases or decreases in AQR's assets under management will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.

        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.

19

Results of Operations

        The following tables present our Affiliates' reported assets under management by operating segment (which are also referred to as distribution channels in this Quarterly Report on Form 10-Q) and a statement of changes for each period.

(1)

Through Managers, we acquired $3.0 billion in assets under management from FIA in January 2005.

        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 represent an average of the assets at the beginning and end of each calendar quarter during the applicable period. We believe that this analysis

20

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

(1)

Assets under management attributable to investments that closed during the relevant periods are included on a weighted average basis for the period from the closing date of the respective investment. These amounts include the assets managed by affiliated investment management firms whose financial results are not consolidated for financial reporting purposes of $0.2 billion and $13.5 billion for the three months ended March 31, 2004 and 2005, respectively.

(2)

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

(3)

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—Supplemental Liquidity Measure." 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.

21

Revenue

        Our revenue is generally determined by the following factors:

•

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);



•

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



•

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



•

the recognition of any performance fees; and



•

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 $50.0 million (or 33%) in the quarter ended March 31, 2005, as compared to the quarter ended March 31, 2004, primarily as a result of a 41% increase in average assets under management. This increase in average assets under management resulted principally from our investments in Genesis, TimesSquare and AQR, as well as the purchase of assets under management from Fremont Investment Advisors ("FIA"). The increase in revenue was proportionately less than the increase in average assets under management primarily as a result of our minority investment in AQR, as we do not consolidate AQR's revenue or expenses. Our average assets under management also increased as a result of positive investment performance in the twelve months ended March 31, 2005.

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

Mutual Fund Distribution Channel

        The increase in revenue of $20.7 million (or 34%) in the Mutual Fund distribution channel in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, resulted primarily from a 33% increase in average assets under management. This increase in average assets under management resulted from positive investment performance and cash flows in the twelve months ended March 31, 2005, and, to a lesser extent, the purchase of mutual fund assets from FIA.

Institutional Distribution Channel

        The increase in revenue of $32.8 million (or 59%) in the Institutional distribution channel in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, resulted primarily from a 75% increase in average assets under management. This increase in average assets under management resulted principally from our investments in Genesis, TimesSquare and AQR. The increase in revenue was proportionately less than the increase in average assets under management primarily as a result of our minority investment in AQR, as we do not consolidate AQR's revenue or expenses. Average assets under management also increased as a result of positive investment

22

performance during the twelve months ended March 31, 2005, and, to a lesser extent, positive net client cash flows.

High Net Worth Distribution Channel

        The decrease in revenue of $3.5 million (or 10%) in the High Net Worth distribution channel in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, resulted primarily from a 17% decrease in average assets under management. The decrease in average assets under management was primarily attributable to net client cash outflows at Rorer Asset Management, LLC, and was partially offset by positive investment performance. The decrease in revenue was comparatively less than the decrease in average assets under management due to the previously discussed effects of advance billing.

Operating Expenses

        The following table summarizes our consolidated operating expenses:

        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 Operating Allocations. During the three months ended March 31, 2005, approximately $37.6 million, or about 46% 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, at our profit-based Affiliates, we generally participate fully in any increase or decrease in revenue and expenses.

        Compensation and related expenses increased 42% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004. The increase resulted from the relationship between revenue and operating expenses at Affiliates with revenue sharing arrangements, which experienced aggregate increases in revenue, and accordingly, reported higher compensation expenses. The increase was also related to $13.3 million of aggregate Affiliate expense from our investments in Genesis and TimesSquare in 2004 (and the inclusion of the compensation expense for those Affiliates) as well as higher holding company compensation relating to equity-based incentive compensation accruals and increases in holding company personnel.

        Selling, general and administrative expenses increased 45% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004. The increase was principally attributable to an increase in sub-advisory and distribution expenses resulting from the growth in assets under

23

management at our Affiliates in the Mutual Fund distribution channel. Also contributing to the increase was $4.0 million in aggregate Affiliate expense from our investments in Genesis and TimesSquare in 2004 (and the inclusion of the additional expenses for those Affiliates).

        Amortization of intangible assets increased 39% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, principally from an increase in definite-lived intangible assets resulting from our investments in new and existing Affiliates during 2004 and changes in the remaining useful lives of our existing acquired client relationships which increased amortization expense.

        Other operating expenses increased 30% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, principally as a result of a $1.0 million increase in aggregate Affiliate expense from our investments in Genesis and TimesSquare in 2004 (and the inclusion of the additional expenses for those Affiliates).

Other Income Statement Data

        The following table summarizes other income statement data:

        Investment and other income primarily consist of the following:

•

our share of income from Affiliates in which we own a minority equity interest, net of any related intangible amortization;



•

earnings on cash and cash equivalent balances; and



•

earnings that Affiliates realize on any investments (in accordance with our Affiliate operating agreements, these earnings are generally allocated to our management partners and accordingly result in an increase in minority interest expense on our Statement of Operations).

        Investment and other income increased 121% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004. The increase was primarily attributable to $3.0 million of income (net of amortization) from our investment in AQR, partially offset by a decrease in holding company interest income.

        Minority interest increased 16% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, principally as a result of the previously discussed increase in revenue. The percentage increase in minority interest was proportionately less than the percentage increase in revenue because of our November 2004 purchase of an additional 19% interest in Friess Associates, which decreased minority interest by $2.7 million, and a $1.5 million increase in investment spending by certain Affiliates from their Owners' Allocation.

        Interest expense increased 11% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004. The increase is principally attributable to our 2004 PRIDES ($1.4 million), the effect of increases in LIBOR on our floating rate senior convertible securities ($1.1 million) and higher borrowings under our senior revolving credit facility ($0.5 million). These increases were partially offset by a decrease of $2.4 million related to our August 2004 repurchase of a

24

portion of the senior notes component of our 2001 PRIDES, and the decrease in the effective interest rate of these notes following the remarketing of the 2001 PRIDES.

        Income taxes increased by 25% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004. This increase is principally attributable to the increase in income before taxes, partially offset by a decrease in our effective tax rate from 41% in the three months ended March 31, 2004 to 38% in the three months ended March 31, 2005. The decrease in the effective tax rate principally resulted from the proportionate increase in income from Affiliates located in lower-taxed jurisdictions.

Net Income

        The following table summarizes Net Income:

        The 41% increase in Net Income in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, resulted principally from the increases in revenue and investment and other income, partially offset by net 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 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 us, 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 convertible securities or other depreciation expenses.

25

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

        Cash Net Income increased 42% in the three months ended March 31, 2005, as compared to the three months ended March 31, 2004, primarily as a result of the previously described factors affecting Net Income.

Liquidity and Capital Resources

        The following table summarizes certain key financial data relating to our liquidity and capital resources:

(1)

The definition of EBITDA is presented in Note 3 on page 21.

        We have met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the quarter ended March 31, 2005 were to make distributions to Affiliate managers and make investments in Affiliates. 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 2004 PRIDES is comprised of a senior note and a

26

forward purchase contract. Under the terms of the securities, the exercise of the forward purchase contracts will result in the issuance of shares of our common stock that will generate cash proceeds equal to the remaining note portion of the securities. 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 2004 PRIDES securities and our net debt approach. At March 31, 2005, our leverage ratio was 2.1:1.

        We have a cash management program that enables our Affiliates to invest their excess cash with us to achieve a competitive rate of return. At March 31, 2005, our Affiliates had invested approximately $25 million with us in this program. These investments are eliminated for accounting purposes and are not reflected on our Consolidated Balance Sheet.

Senior Revolving Credit Facility

        We have a senior revolving credit facility ("Facility") with a syndicate of major commercial banks under which we may borrow up to $405 million 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. The Facility has a maturity date of August 2007; subject to the agreement of the lenders (or prospective lenders) to increase their commitments, we have the option to increase the Facility up to an aggregate of $450 million. The Facility contains financial covenants with respect to net worth, leverage and interest coverage. The Facility also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Facility are collateralized by pledges of all capital stock or other equity interests owned by us.

Senior Notes Due 2006

        In December 2001, we issued $230 million of mandatory convertible securities ("2001 PRIDES"). Each unit of the 2001 PRIDES initially consisted of (i) a senior note due November 17, 2006 with a principal amount of $25 per note, and (ii) a forward purchase contract pursuant to which the holder agreed to purchase shares of our common stock on November 17, 2004, with the number of shares determined based upon the average trading price of our common stock for a period preceding that date.

        Following the August 2004 repurchase of $154.3 million in aggregate principal amount of the senior notes component of the 2001 PRIDES and settlement of the forward purchase contracts in November 2004, $75.8 million in aggregate principal amount of the senior notes component of the 2001 PRIDES (the "Senior Notes due 2006") remain outstanding, with an interest rate of 5.41% and a maturity date of November 2006.

Zero Coupon Senior Convertible Notes

        In May 2001, we issued $251 million principal amount at maturity of zero coupon senior convertible notes due 2021 ("zero coupon convertible notes"), with each note issued at 90.50% of such principal amount and accreting at a rate of 0.50% per year. Following our 2003 repurchase of $116.5 million principal amount, $134.5 million principal amount at maturity of zero coupon convertible notes remains outstanding. Each security is convertible into 17.429 shares of our common stock 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 in April 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 in May 2006, 2011 and 2016. If the holders exercise this option in the future, we may elect to repurchase the securities with cash, shares of our common stock or some combination thereof. We have the option

27

to redeem the securities for cash on or after May 7, 2006 at their accreted value. Under the terms of the indenture governing the zero coupon convertible notes, through June 30, 2005 a holder may convert such security into common stock by following the conversion procedures in the indenture; the zero coupon convertible notes may cease to be convertible in the future.

Floating Rate Senior Convertible Securities

        In February 2003, we issued $300 million of floating rate senior convertible securities due 2033 ("floating rate convertible securities"). The floating rate convertible securities bear interest at a rate equal to 3-month LIBOR minus 0.50%, payable in cash quarterly. Each security is convertible into shares of our common stock upon the occurrence of certain events, including the following: (i) if the closing price of a share of our common stock exceeds $65.00 over certain periods; (ii) if the credit rating assigned by Standard & Poor's is below BB-; or (iii) if we call the securities for redemption. Upon conversion, holders of the securities will receive 18.462 shares of our common stock for each 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 common stock based on the stock price at that time. Based on the trading price of our common stock as of March 31, 2005, upon conversion a holder of each security would receive an additional 1.426 shares. The holders of the floating rate convertible securities may require us to repurchase such securities in February 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 may redeem the convertible securities for cash at any time on or after February 25, 2008, at its principal amount.

        We entered into interest rate swap contracts that effectively exchange the variable interest rate for a fixed interest rate on $150 million of the floating rate convertible securities. For the period through February 2008, we will pay a weighted average fixed rate of 3.3% on that notional amount.