10-Q 1 art-20130331x10q.htm 10-Q ART-2013.03.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-34457
ARTIO GLOBAL INVESTORS INC.
(Exact name of registrant as specified in its charter)
Delaware
 
13-6174048
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
330 Madison Ave.
New York, NY
 
10017
(Address of principal executive offices)
 
(Zip Code)
(212) 297-3600
(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.    x  Yes        ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ((§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes        ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes        x  No

As of April 30, 2013, there were 60,548,105 shares outstanding of the registrant’s Class A common stock, par value $0.001 per share, and no shares outstanding of the registrant’s Class B common stock, par value $0.001 per share, or Class C common stock, par value $0.01 per share.




ARTIO GLOBAL INVESTORS INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Financial Position
(Unaudited)
 
 
As of
(in thousands, except for share amounts)
 
March 31, 2013
 
December 31, 2012
ASSETS
 
 
 
 
Cash
 
$
68,574

 
$
91,751

Investments, at fair value:
 
 
 
 
Artio Global funds held for deferred compensation
 
10,186

 
10,149

Investments owned by the Consolidated Investment Products (including $3,060 in 2013 and $4,265 in 2012 pledged as collateral for debt)
 
49,810

 
53,191

Fees receivable and accrued fees, net of allowance for doubtful accounts
 
9,322

 
12,158

Deferred taxes, net of valuation allowance of $180,486 in 2013 and $178,483 in 2012
 
9,798

 
16,140

Income taxes receivable
 
15,268

 
9,896

Due from brokers
 
13,384

 
13,450

Other assets
 
10,293

 
9,865

Total assets
 
$
186,635

 
$
216,600

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Liability under total return swap
 
$
2,921

 
$
4,104

Accrued compensation and benefits
 
11,123

 
27,637

Accounts payable and accrued expenses
 
7,066

 
5,167

Investments sold, not yet purchased by the Consolidated Investment Products, at fair value
 
2,062

 
2,483

Accrued income taxes payable
 
1,443

 
2,232

Due under tax receivable agreement
 
9,985

 
14,498

Due to brokers
 
4,209

 
4,756

Other liabilities
 
2,082

 
1,635

Total liabilities
 
40,891

 
62,512

 
 
 
 
 
Commitments and contingencies (Note 13)
 

 

 
 
 
 
 
Class A common stock (500,000,000 shares authorized, 2013 – 60,548,105 shares issued and outstanding; 2012 – 60,009,073 shares issued and outstanding)
 
60

 
60

Additional paid-in capital
 
665,633

 
662,529

Accumulated deficit
 
(532,293
)
 
(521,551
)
Total stockholders’ equity
 
133,400

 
141,038

Non-controlling interests
 
12,344

 
13,050

Total equity
 
145,744

 
154,088

Total liabilities and equity
 
$
186,635

 
$
216,600

 
See accompanying notes to unaudited consolidated financial statements.


Artio Global Investors Inc. First Quarter 2013 Form 10-Q 3



ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands, except per share information)
 
2013
 
2012
Revenues and other operating income:
 
 
 
 
Investment management fees
 
$
15,336

 
$
42,771

Net gains on funds held for deferred compensation
 
299

 
1,160

Foreign currency losses
 
(39
)
 
(1
)
Total revenues and other operating income
 
15,596

 
43,930

 
 
 
 
 
Expenses:
 
 
 
 
Employee compensation and benefits
 
14,551

 
22,334

Shareholder servicing and marketing
 
1,941

 
3,624

General and administrative
 
10,718

 
9,738

Total expenses
 
27,210

 
35,696

Operating income (loss) before income tax expense
 
(11,614
)
 
8,234

Non-operating income (loss):
 
 
 
 
The Consolidated Investment Products and other seed money investments:
 
 
 
 
Interest income, net
 
501

 
934

Net gains
 
1,139

 
2,081

Expenses
 
(141
)
 
(13
)
Total
 
1,499

 
3,002

Interest income (expense), net
 
180

 
(435
)
Reduction in liability under tax receivable agreement
 
5

 

Other expense
 
(3
)
 
(11
)
Total non-operating income
 
1,681

 
2,556

Income (loss) before income tax expense
 
(9,933
)
 
10,790

Income taxes
 
270

 
5,322

Net income (loss)
 
(10,203
)
 
5,468

Net income attributable to non-controlling interests in Holdings
 

 
190

Net income attributable to non-controlling interests in the Consolidated Investment Products
 
539

 
678

Net income (loss) attributable to Artio Global Investors
 
$
(10,742
)
 
4,600

 
 
 
 
 
Per share information:
 
 
 

Basic net income (loss) attributable to Artio Global Investors
 
$
(0.18
)
 
$
0.08

Diluted net income (loss) attributable to Artio Global Investors
 
$
(0.18
)
 
$
0.08

 
 
 
 
 
Weighted average shares used to calculate per share information:
 
 
 

Basic
 
60,350

 
58,193

Diluted
 
60,350

 
58,475

 
 
 
 
 
Dividends per basic share declared

 
$

 
$
0.06


See accompanying notes to unaudited consolidated financial statements.


4 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
(in thousands, except per
share information)
 
Class  A
Common
Stock
(par value
$0.001)
 
Class  B
Common
Stock
(par value
$0.001)
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Total Stock-
holders’
Equity
 
Non-
controlling
Interests  in
Holdings
 
Non-
controlling
Interests
in the
Consolidated
Investment
Products
 
Total
Equity
Balance as of January 1, 2012
 
$
58

 
$
1

 
$
629,553

 
$
(466,782
)
 
$
162,830

 
$
1,857

 
$
13,581

 
$
178,268

Net income
 

 

 

 
4,600

 
4,600

 
190

 
678

 
5,468

Share-based payments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization
 

 

 
4,542

 

 
4,542

 

 

 
4,542

Dividend equivalents
 

 

 
215

 
(215
)
 

 

 

 

Capital contributions  from non-
controlling interests
 

 

 

 

 

 

 
151

 
151

Distribution to non-controlling
interests
 

 

 

 

 

 
(249
)
 

 
(249
)
Cash dividends paid ($0.06
per share)
 

 

 

 
(3,497
)
 
(3,497
)
 

 

 
(3,497
)
Balance as of March 31, 2012
 
$
58

 
$
1

 
$
634,310

 
$
(465,894
)
 
$
168,475

 
$
1,798

 
$
14,410

 
$
184,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2013
 
$
60

 
$

 
$
662,529

 
$
(521,551
)
 
$
141,038

 
$

 
$
13,050

 
$
154,088

Net loss
 

 

 

 
(10,742
)
 
(10,742
)
 

 
539

 
(10,203
)
Share-based payments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Directors’ awards
 

 

 
80

 

 
80

 

 

 
80

Amortization
 

 

 
3,031

 

 
3,031

 

 

 
3,031

Forfeitures
 

 

 
(7
)
 

 
(7
)
 

 

 
(7
)
Distribution to non-controlling
interests
 

 

 

 

 

 

 
(1,245
)
 
(1,245
)
Balance as of March 31, 2013
 
$
60

 
$

 
$
665,633

 
$
(532,293
)
 
$
133,400

 
$

 
$
12,344

 
$
145,744


See accompanying notes to unaudited consolidated financial statements.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 5



ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(10,203
)
 
$
5,468

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
608

 
598

Deferred compensation
 
1,075

 
1,905

Share-based compensation
 
3,104

 
4,542

Deferred income taxes
 
6,342

 
4,905

Interest accrued on investments and accretion and amortization of premium and discount
 
84

 

(Gains)/losses on investments
 
(338
)
 
(3,241
)
Changes in assets and liabilities:
 
 
 
 
Purchases by the Consolidated Investment Products and of other seed money investments
 
(8,480
)
 
(32,300
)
Proceeds from sales or maturities by the Consolidated Investment Products and from other seed money investments
 
11,952

 
18,170

Fees receivable and accrued fees, net of allowance for doubtful accounts
 
2,836

 
4,002

Income taxes receivable
 
(5,372
)
 
(1,962
)
Due from brokers
 
66

 

Other assets
 
(942
)
 
(6,783
)
Debt of the Consolidated Investment Products
 

 
10,622

Accrued compensation and benefits
 
(17,589
)
 
(27,436
)
Accounts payable and accrued expenses
 
1,938

 
(585
)
Accrued income taxes payable
 
(789
)
 
(13
)
Due under tax receivable agreement
 
(4,513
)
 
(6,981
)
Due to brokers
 
(547
)
 
9,593

Other liabilities
 
(111
)
 
(321
)
Net cash used in operating activities
 
(20,879
)
 
(19,817
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchase of Artio Global funds held for deferred compensation
 
(5,012
)
 
(4,401
)
Proceeds from redemptions of Artio Global funds held for deferred compensation
 
5,275

 
4,971

Purchase of fixed assets
 
(94
)
 
(190
)
Net cash provided by investing activities
 
169

 
380



6 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
Cash flows from financing activities:
 
 
 
 
Repayments of borrowing under term credit facility
 

 
(37,500
)
Repayments under the total return swap
 
(1,183
)
 

Distributions paid to non-controlling interests in Holdings
 

 
(249
)
Distributions paid to non-controlling interests in the Consolidated Investment Products
 
(1,245
)
 

Contributions from non-controlling interests in the Consolidated
Investment Products
 

 
151

Cash dividends paid
 

 
(3,497
)
Net cash used in financing activities
 
(2,428
)
 
(41,095
)
 
 
 
 
 
Effect of exchange rates on cash
 
(39
)
 
(1
)
Net decrease in cash
 
(23,177
)
 
(60,533
)
Cash:
 
 
 
 
Beginning of period
 
91,751

 
110,252

End of period
 
$
68,574

 
$
49,719

 
 
 
 
 
Cash paid during period for:
 
 
 
 
Income taxes, net of refunds
 
$
(8
)
 
$
2,392

Interest expense
 

 
310


See accompanying notes to unaudited consolidated financial statements.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 7



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)


Note 1.  Organization and Description of Business

Artio Global Investors Inc. (“Investors” or the “Company”) and subsidiaries (collectively, “we,” “us” or “our”) comprises Investors and its subsidiaries, including Artio Global Holdings LLC (“Holdings”), an intermediate holding company that owns Artio Global Management LLC (“Investment Adviser”), a registered investment adviser under the Investment Advisers Act of 1940, as amended; Artio Global Institutional Services LLC, which was deregistered as a limited-purpose broker-dealer in the first quarter of 2013; and certain investment vehicles we consolidate because we have a controlling financial interest in them (the “Consolidated Investment Products”). The Consolidated Investment Products have investors whose interests are reflected as Non-controlling interests in the Consolidated Investment Products in the consolidated financial statements.

On February 14, 2013, we announced that we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aberdeen Asset Management PLC, a public limited company organized under the laws of the United Kingdom (“Aberdeen”), and Guardian Acquisition Corporation, a Delaware corporation and an indirect wholly owned subsidiary of Aberdeen (“Merger Subsidiary”), pursuant to which Aberdeen, subject to certain conditions, will acquire all of our outstanding Class A common stock for $2.75 in cash per share.

We currently expect to complete the proposed merger by the end of the second quarter of 2013, pending the approval of the merger by our stockholders. The merger is also subject to a number of additional conditions and regulatory approvals, including, but not limited to, approval of a new advisory agreement by certain of our mutual fund shareholders. (see Note 12. Acquisition by Aberdeen).

Investment Adviser is our primary operating entity and provides investment management services to institutional and mutual fund clients. It manages and advises the Artio Global Funds (the “Funds”), which are U.S. registered investment companies; commingled institutional investment vehicles; separate accounts; sub-advisory accounts; and a hedge fund. A substantial portion of our assets under management (“AuM”) are invested outside of the U.S., while our clients are primarily U.S.-based.

For select new product initiatives, we invest in the related investment vehicles in order to provide critical asset mass. We refer to these investments as “seed money investments.” If a seed money investment is required to be consolidated, it is reflected within the Consolidated Investment Products.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (”U.S. GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities (including contingent liabilities), revenues, and expenses as of the date of the consolidated financial statements. Actual results could differ from those estimates and may have a material effect on the consolidated financial statements.

Our interim consolidated financial statements are unaudited. Interim results reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results. Revenues and other operating income, Total non-operating income (loss) and Net income (loss) can vary significantly from quarter to quarter due to the nature of our business activities. The financial results of interim periods may not be indicative of the financial results for the entire year.

As part of the preparation of the interim consolidated financial statements, we performed an evaluation of subsequent events occurring after the Consolidated Statement of Financial Position date of March 31, 2013, through to the date the interim consolidated financial statements were issued.

These statements should be read in conjunction with our consolidated financial statements and related notes as of December 31, 2012, and for the three years then ended, included in our 2012 Annual Report on Form 10-K.



8 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 2.  Stockholders’ Equity

The table below sets forth the number of shares of Class A common stock issued and outstanding as of December 31, 2012, and March 31, 2013.
(in thousands)
 
Class A
Common Stock
As of December 31, 2012(b)
 
60,009

Activity:
 
 
Restricted stock units vested
 
499

Shares issued to the independent directors(a)
 
40

As of March 31, 2013(b)
 
60,548


(a)
Represents the 39,801 shares of fully vested Class A common stock (subject to transfer restrictions) that were awarded to a new independent director during the three months ended March 31, 2013.
(b)
The table does not reflect 3.5 million restricted stock units and shares awarded to certain employees as of December 31, 2012, and 5.6 million awarded to certain employees as of March 31, 2013 (see Note 8. Share-Based Payments). Each restricted stock unit or share represents the right to receive one share of unrestricted Class A common stock upon vesting.

In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our common stock. As of March 31, 2013, we retain the authority to purchase up to an aggregate of 2,226,061 shares of our Class A common stock through December 31, 2013. Pursuant to the terms of the Merger Agreement, Investors may not repurchase its Class A common stock without consent from Aberdeen, except in connection with the terms of share-based payments.

As of March 31, 2013, and December 31, 2012, there were 50 million shares of Investors’ Class B common stock, par value $0.001, authorized and no shares issued or outstanding, and 210 million shares of Investors’ Class C common stock, par value $0.01, authorized and no shares issued or outstanding.

Note 3.  Consolidated Investment Products

From time to time we make seed money investments in the vehicles we manage. We evaluate these investment vehicles for consolidation. They are consolidated if they are (i) variable interest entities; and we are the primary beneficiary, or (ii) voting rights entities, and we have a controlling financial interest.

We have a controlling financial interest in the Consolidated Investment Products, which are therefore included in our consolidated financial statements. The assets and liabilities of the Consolidated Investment Products are included in their respective accounts in the Consolidated Statement of Financial Position, and the results of their operations are included in Non-operating income (loss) in the Consolidated Statement of Operations.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 9



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A condensed consolidating statement of financial position as of March 31, 2013, including balances attributable to the Consolidated Investment Products, is as follows:
 
(in thousands)
 
Before
Consolidation
(a)
 
Consolidated
Investment
Products
 
Eliminations
 
Artio Global
Investors Inc. and
Subsidiaries
Consolidated
Assets:
 
 
 
 
 
 
 
 
Cash
 
$
66,641

 
$
1,933

 
$

 
$
68,574

Investments, at fair value
 
10,186

 
49,810

 

 
59,996

Investment in the Consolidated Investment Products
 
45,765

 
 
 
(45,765
)
 
 
Other assets
 
41,282

 
16,783

 

 
58,065

Total assets
 
$
163,874

 
$
68,526

 
$
(45,765
)
 
$
186,635

 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities under the total return swap
 
$

 
$
2,921

 
$

 
$
2,921

Investments sold, not yet purchased by the Consolidated Investment Products, at fair value
 

 
2,062

 

 
2,062

Other liabilities
 
30,474

 
5,434

 

 
35,908

Total liabilities
 
30,474

 
10,417

 

 
40,891

 
 
 
 
 
 
 
 
 
Members’ equity
 
 
 
33,652

 
(33,652
)
 

Net asset value
 
 
 
24,457

 
(24,457
)
 

Common stock
 
60

 
 
 

 
60

Additional paid-in capital
 
665,633

 
 
 

 
665,633

Accumulated deficit
 
(532,293
)
 
 
 

 
(532,293
)
Total stockholders’ equity
 
133,400

 
58,109

 
(58,109
)
 
133,400

Non-controlling interests
 

 
 
 
12,344

 
12,344

Total equity
 
133,400

 
58,109

 
(45,765
)
 
145,744

Total liabilities and equity
 
$
163,874

 
$
68,526

 
$
(45,765
)
 
$
186,635


(a)
Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method.



10 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A condensed consolidating statement of financial position as of December 31, 2012, including balances attributable to the Consolidated Investment Products, is as follows:
(in thousands)
 
Before
Consolidation
(a)
 
Consolidated
Investment
Products
 
Eliminations
 
Artio Global
Investors Inc. and
Subsidiaries
Consolidated
Assets:
 
 
 
 
 
 
 
 
Cash
 
$
90,854

 
$
897

 
$

 
$
91,751

Investments, at fair value
 
10,149

 
53,191

 

 
63,340

Investment in the Consolidated Investment Products
 
44,717

 
 
 
(44,717
)
 
 
Other assets
 
45,868

 
15,641

 

 
61,509

Total assets
 
$
191,588

 
$
69,729

 
$
(44,717
)
 
$
216,600

 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities under total return swap
 
$

 
$
4,104

 
$

 
$
4,104

Investments sold, not yet purchased by the Consolidated Investment Products, at fair value
 

 
2,483

 

 
2,483

Other liabilities
 
50,550

 
5,375

 

 
55,925

Total liabilities
 
50,550

 
11,962

 

 
62,512

 
 
 
 
 
 
 
 
 
Members’ equity
 
 
 
32,128

 
(32,128
)
 

Net asset value
 
 
 
25,639

 
(25,639
)
 

Common stock
 
60

 
 
 

 
60

Additional paid-in capital
 
662,529

 
 
 

 
662,529

Accumulated deficit
 
(521,551
)
 
 
 

 
(521,551
)
Total stockholders’ equity
 
141,038

 
57,767

 
(57,767
)
 
141,038

Non-controlling interests
 

 
 
 
13,050

 
13,050

Total equity
 
141,038

 
57,767

 
(44,717
)
 
154,088

Total liabilities and equity
 
$
191,588

 
$
69,729

 
$
(44,717
)
 
$
216,600


(a)
Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 11



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A condensed consolidating statement of operations for three months ended March 31, 2013 and 2012, including amounts attributable to the Consolidated Investment Products, is as follows:
(in thousands)
 
Before
Consolidation
(a)
 
Consolidated
Investment
Products
 
Eliminations
 
Artio Global
Investors Inc. and
Subsidiaries
Consolidated
For the three months ended March 31, 2013:
 
 
 
 
 
 
 
 
Total revenues and other operating income
 
$
15,593

 
$

 
$
3

 
$
15,596

Total expenses
 
27,210

 

 

 
27,210

Operating income (loss) before income tax expense
 
(11,617
)
 

 
3

 
(11,614
)
Non-operating income:
 
 
 
 
 
 
 
 
Equity in earnings of the Consolidated Investment Products
 
1,048

 
 
 
(1,048
)
 

Other
 
97

 
1,587

 
(3
)
 
1,681

Total non-operating income
 
1,145

 
1,587

 
(1,051
)
 
1,681

Income (loss) before income tax expense
 
(10,472
)
 
1,587

 
(1,048
)
 
(9,933
)
Income taxes
 
270

 

 

 
270

Net income (loss)
 
(10,742
)
 
1,587

 
(1,048
)
 
(10,203
)
Net income attributable to non-controlling interests
 

 

 
539

 
539

Net income (loss), excluding non-controlling interests
 
$
(10,742
)
 
$
1,587

 
$
(1,587
)
 
$
(10,742
)
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2012:
 
 
 
 
 
 
 
 
Total revenues and other operating income
 
$
43,904

 
$

 
$
26

 
$
43,930

Total expenses
 
35,696

 

 

 
35,696

Operating income before income tax expense
 
8,208

 

 
26

 
8,234

Non-operating income:
 
 
 
 
 
 
 
 
Equity in earnings of the Consolidated Investment Products
 
1,883

 
 
 
(1,883
)
 

Other
 
21

 
2,561

 
(26
)
 
2,556

Total non-operating income
 
1,904

 
2,561

 
(1,909
)
 
2,556

Income before income tax expense
 
10,112

 
2,561

 
(1,883
)
 
10,790

Income taxes
 
5,322

 

 

 
5,322

Net income
 
4,790

 
2,561

 
(1,883
)
 
5,468

Net income attributable to non-controlling interests
 
190

 

 
678

 
868

Net income, excluding non-controlling interests
 
$
4,600

 
$
2,561

 
$
(2,561
)
 
$
4,600


(a)
Represents Artio Global Investors Inc. and subsidiaries with the investment in the Consolidated Investment Products accounted for under the equity method.





12 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A condensed consolidating statement of cash flows for the three months ended March 31, 2013 and 2012, including balances attributable to the Consolidated Investment Products, is as follows:
(in thousands)
 
Before
Consolidation
 
Consolidated
Investment
Products
 
Eliminations
 
Artio Global
Investors Inc. and
Subsidiaries
Consolidated
For the three months ended March 31, 2013:
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
(24,343
)
 
$
3,464

 
$

 
$
(20,879
)
Net cash provided by investing activities
 
169

 

 

 
169

Net cash provided by (used in) financing activities
 

 
(2,428
)
 

 
(2,428
)
Effect of exchange rates on cash
 
(39
)
 

 

 
(39
)
Net decrease in cash
 
(24,213
)
 
1,036

 

 
(23,177
)
Cash - beginning of period
 
90,854

 
897

 

 
91,751

Cash - end of period
 
$
66,641

 
$
1,933

 
$

 
$
68,574

 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2012:
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
(20,717
)
 
$
900

 
$

 
$
(19,817
)
Net cash provided by investing activities
 
380

 

 

 
380

Net cash provided by (used in) financing activities
 
(41,245
)
 
150

 

 
(41,095
)
Effect of exchange rates on cash
 
(1
)
 

 

 
(1
)
Net increase (decrease) in cash
 
(61,583
)
 
1,050

 

 
(60,533
)
Cash - beginning of period
 
108,518

 
1,734

 

 
110,252

Cash - end of period
 
$
46,935

 
$
2,784

 
$

 
$
49,719


Note 4.  Related Party Activities

We engage in transactions with various related parties, including affiliates of our former sole stockholder, GAM Holding AG (“GAM”), a Swiss corporation.

Affiliate Transactions – Mutual and Offshore Funds

We earn management fees from the Funds, as Investment Adviser provides investment management services to the Funds pursuant to investment management agreements with the Funds. The investment management agreements are subject to annual review and approval by their boards. Investment Adviser also derives investment management revenue from sub-advising certain offshore funds sponsored by affiliates of GAM. Revenues related to these services are included in Investment management fees on the Consolidated Statement of Operations as follows:
 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
Funds’ investment management fees
 
$
10,301

 
$
24,837

Sub-advisory investment management fees on GAM-sponsored funds
 
362

 
367


Fees receivable related to investment management fees are included in Fees receivable and accrued fees, net of allowance for doubtful accounts on the Consolidated Statement of Financial Position as follows:
 
 
As of
(in thousands)
 
March 31,
2013
 
December 31, 2012
Funds’ investment management fees
 
$
2,974

 
$
3,965

Sub-advisory investment management fees on GAM-sponsored funds
 
402

 
421



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 13



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

 
Tax Receivable Agreement

We have a tax receivable agreement, which was amended and restated in February 2013 in connection with the proposed merger, that requires us to share certain tax benefits with Richard Pell, our Chief Investment Officer (“Pell”), and Rudolph-Riad Younes, our Head of International Equity (“Younes,” together with Pell, the “Principals”).

During the three months ended March 31, 2013, we made an aggregate payment of approximately $4.5 million to the Principals pursuant to this agreement for the liability relating to the 2012 tax returns.

Other Related Party Transactions

Investors sponsors the non-contributory qualified defined contribution 401(k) plan (which covers most employees) and the supplemental non-qualified defined contribution plan, and manages the assets of those plans at no cost to the plans.

Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated Investment Products, at Fair Value

Investments, at fair value, as of March 31, 2013 and December 31, 2012, consist of the following:
 
 
As of
(in thousands)
 
March 31,
2013
 
December 31, 2012
Artio Global funds held for deferred compensation:
 
 
 
 
Artio Global funds
 
$
10,186

 
$
10,149

Total Artio Global funds held for deferred compensation
 
$
10,186

 
$
10,149

Investments owned by the Consolidated Investment Products:
 
 
 
 
Equity securities
 
$
3,473

 
$
3,766

Fixed income investments:
 
 
 
 
Corporate bonds
 
23,965

 
24,291

Sovereign and international financial organization debt
 
17,259

 
19,028

Term loans
 
3,807

 
5,372

Warrants
 
173

 
182

Asset-backed securities
 
410

 
220

Resell agreements
 
723

 
332

Total investments owned by the Consolidated Investment Products
 
$
49,810

 
$
53,191

Investments sold, not yet purchased by the Consolidated Investment Products:
 
 
 
 
Fixed income investments:
 
 
 
 
Corporate bonds
 
$
(2,062
)
 
$
(2,483
)
Total investments sold, not yet purchased by the Consolidated Investments Products
 
$
(2,062
)
 
$
(2,483
)

One of our consolidated investment vehicles entered into a total return swap with an external counterparty. At inception, we accounted for the swap as a financing transaction since the reference portfolio comprised investments we owned. Accordingly, those investments are included in Investments, at fair value: Investments owned by the Consolidated Investment Products and the cash collateral we received under the terms of the swap is included as a collateralized loan in Liability under total return swap in the Consolidated Statement of Financial Position. Subsequent purchases under the total return swap are accounted for as an off-balance sheet derivative.

Term loans includes $3.1 million as of March 31, 2013, and $4.3 million as of December 31, 2012, that comprise part of a reference portfolio for the total return swap. The counterparty to the swap is not obligated to hold these investments and may dispose of them. The collateralized loan associated with the on-balance sheet portion of the swap outstanding as of March 31,


14 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

2013, was $2.9 million and as of December 31, 2012, was $4.1 million, and is included in Liability under total return swap in the Consolidated Statement of Financial Position.

Net gains (losses) for the quarters ended March 31, 2013 and 2012 are as follows:
 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
Net gains on Artio Global funds held for deferred compensation
 
$
299

 
$
1,160

Less: Net gains on redeemed Artio Global funds held for deferred compensation
 
448

 
553

Unrealized gains (losses) on Artio Global funds held for deferred compensation
 
$
(149
)
 
$
607

 
 
 
 
 
Net gains (losses) – the Consolidated Investment Products and other seed money investments:
 
 
 
 
Net gains on investments of the Consolidated Investment Products
 
$
1,139

 
$
1,615

Less: Net gains (losses) on investments of the Consolidated Investment Products sold or matured
 
563

 
(1,148
)
Unrealized gains on investments of the Consolidated Investment Products
 
$
576

 
$
2,763

 
 
 
 
 
Net gains on other seed money investments
 
$

 
$
466

Less: Net gains on other seed money investments sold, matured or redeemed
 

 
15

Unrealized gains on other seed money investments
 
$

 
$
451

 
 
 
 
 
Total net gains – the Consolidated Investment Products and other seed money investments
 
$
1,139

 
$
2,081

Less: Total net gains (losses) on the Consolidated Investment and other seed money investments sold, matured or redeemed
 
563

 
(1,133
)
Total unrealized gains on the Consolidated Investment Products and other seed money investments
 
$
576

 
$
3,214


The Consolidated Investment Products’ investment income, including unrealized gains and losses and income from derivative contracts, is recorded in Non-operating income (loss): The Consolidated Investment Products and other seed money investments: Net gains (losses) in the Consolidated Statement of Operations and is derived from the following investment categories:
 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
Equity securities
 
$
64

 
$
198

Fixed income investments:
 
 
 
 
Corporate bonds
 
266

 
895

Sovereign and international financial organization debt
 
(98
)
 
908

Term loans
 
367

 
420

Warrants
 
(10
)
 
47

Asset-backed securities
 
8

 

Total return swap
 
794

 

Credit default swaps
 
(396
)
 
(521
)
Interest rate swaps
 
17

 

Foreign exchange contracts
 
19

 
(136
)
Options
 
9

 
(190
)
Other
 
99

 
(6
)
Total net gains – the Consolidated Investment Products
 
$
1,139

 
$
1,615




Artio Global Investors Inc. First Quarter 2013 Form 10-Q 15



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Our investments as of March 31, 2013, are valued using prices as follows:
(in thousands)
 
Total
 
Level 1
Quoted  Prices
 
Level 2
Other  Observable
Inputs
 
Level 3
Significant
Unobservable 
Inputs
Artio Global funds held for deferred compensation:
 
 
 
 
 
 
 
 
Artio Global funds
 
$
10,186

 
$
10,186

 
$

 
$

Total Artio Global funds held for deferred compensation
 
$
10,186

 
$
10,186

 
$

 
$

Investments owned by the Consolidated Investment Products:
 
 
 
 
 
 
 
 
Investments owned by the Consolidated Investment Products:
 
 
 
 
 
 
 
 
Equity securities
 
$
3,473

 
$
1,962

 
$
1,469

 
$
42

Fixed income investments:
 
 
 
 
 
 
 
 
Corporate bonds
 
23,965

 
392

 
23,573

 

Sovereign and international financial organization debt
 
17,259

 

 
17,259

 

Term loans
 
3,807

 

 
3,807

 

Warrants
 
173

 
173

 

 

Asset-backed securities
 
410

 

 
410

 

Resell agreements
 
723

 

 
723

 

Total investments owned by the Consolidated Investment Products
 
$
49,810

 
$
2,527

 
$
47,241

 
$
42

Investments sold, not yet purchased by the Consolidated Investments Products:
 
 
 
 
 
 
 
 
Fixed income investments:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
(2,062
)
 
$

 
$
(2,062
)
 
$

Total investments sold, not yet purchased by the Consolidated Investment Products
 
$
(2,062
)
 
$

 
$
(2,062
)
 
$

 


16 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Our investments as of December 31, 2012, are valued using prices as follows:
(in thousands)
 
Total
 
Level 1
Quoted  Prices
 
Level 2
Other  Observable
Inputs
 
Level  3
Significant
Unobservable 
Inputs
Artio Global funds held for deferred compensation:
 
 
 
 
 
 
 
 
Artio Global funds
 
$
10,149

 
$
10,149

 
$

 
$

Total Artio Global funds held for deferred compensation
 
$
10,149

 
$
10,149

 
$

 
$

Investments owned by the Consolidated Investment Products:
 
 
 
 
 
 
 
 
Equity securities
 
$
3,766

 
$
2,268

 
$
1,457

 
$
41

Fixed income investments:
 
 
 
 
 
 
 
 
Corporate bonds
 
24,291

 

 
24,291

 

Sovereign and international financial organization debt
 
19,028

 

 
19,028

 

Term loans
 
5,372

 

 
4,375

 
997

Warrants
 
182

 
182

 

 

Asset-backed securities
 
220

 

 
220

 

Resell agreements
 
332

 

 
332

 

Total investments owned by the Consolidated Investment Products
 
$
53,191

 
$
2,450

 
$
49,703

 
$
1,038

Investments sold, not yet purchased by the Consolidated Investments Products:
 
 
 
 
 
 
 
 
Fixed income investments:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
(2,483
)
 
$

 
$
(2,483
)
 
$

Total investments sold, not yet purchased by the Consolidated Investment Products
 
$
(2,483
)
 
$

 
$
(2,483
)
 
$

 
Derivative contracts, which are included in Other assets and Other liabilities on the Consolidated Statement of Financial Position, are valued using Level 2 inputs.

There were no transfers between Level 1 and Level 2 securities.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 17



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Significant changes in Level 3 securities are as follows: 
 
 
As of March 31,
(in thousands)
 
2013
 
2012
Equity securities owned by the Consolidated Investment Products:
 
 
 
 
Beginning of period
 
$
41

 
$
52

Net gains (losses) during the period
 
1

 
(16
)
End of period
 
$
42

 
$
36

Equity securities – total gains (losses) for the year attributable to the change in unrealized gains or losses relating to assets still held as of the end of the period
 
$
1

 
$
(39
)
 
 
 
 
 
Corporate bonds owned by the Consolidated Investment Products:
 
 
 
 
Beginning of period
 
$

 
$
413

Transfers to Level 2
 

 
(159
)
Net losses during the period
 

 
(218
)
End of period
 
$

 
$
36

Corporate bonds – total losses for the year attributable to the change in unrealized gains or losses relating to assets still held as of the end of the period
 
$

 
$
(5
)
 
 
 
 
 
Term loans owned by the Consolidated Investment Products:
 
 
 
 
Beginning of period
 
$
997

 
$
947

Purchases
 

 
1,919

Sales
 
(998
)
 
(966
)
Amortization
 
(9
)
 

Net gains during the period
 
10

 
2

End of period
 
$

 
$
1,902

Term loans – total losses for the year attributable to the change in unrealized gains or losses relating to assets still held as of the end of the period
 
$

 
$
(15
)
 
The transfers from Level 3 to Level 2 were due to the availability of an additional external observable pricing source.

We use a market-yield analysis approach to value our Level 3 term loan investments. We consider the number of contributors used by an authorized pricing service for their valuation of a particular asset a direct reflection of liquidity. If an authorized pricing service reports using only one indicator quote, we classify the asset as Level 3. We review prices obtained from the authorized pricing services, using our own observations of market yields for similar instruments, for yield and reasonableness. Based on our internal review, the pricing committee may revalue the loans if it believes the pricing service valuation does not reflect our observations of market yields. As of March 31, 2013, they did not revalue any loans.



18 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 6.  Derivative Contracts

The Consolidated Investment Products employ credit default swaps, total return swaps, foreign exchange contracts and options contracts as part of their trading strategies and are accounted for as trading products.

 
 
Notional/Nominal Amounts as of
 
Average Notional/Nominal Amount Outstanding
for the Three Months Ending
(in thousands)
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
March 31, 2012
Credit default swaps
 
$
898

 
$
20,490

 
$
725

 
$
15,187

Total return swap
 
42,104

 
37,878

 
39,991

 

Interest rate swaps
 
30,000

 
30,000

 
30,000

 

Foreign exchange contracts
 
13,374

 
12,016

 
11,092

 
16,486

Option contracts
 

 
9

 
3

 
6,120


Fair value of derivative contracts as of March 31, 2013 and December 31, 2012, is as follows:
 
 
Assets
 
Liabilities
(in thousands)
 
Statement of
Financial Position
Location
 
Fair Value
 
Statement of
Financial Position
Location
 
Fair Value
As of March 31, 2013:
 
 
 
 
 
 
 
 
Credit default swaps
 
Other assets
 
$
340

 
Other liabilities
 
$
558

Total return swap
 
Other assets
 
1,578

 
 
 
 
Interest rate swaps
 
 
 
 
 
Other liabilities
 
2

Foreign exchange contracts
 
Other assets
 
142

 
Other liabilities
 
16

 
 
 
 
 
 
 
 
 
As of December 31, 2012:
 
 
 
 
 
 
 
 
Credit default swaps
 
Other assets
 
$
180

 

 

Total return swap
 
Other assets
 
785

 

 

Interest rate swaps
 

 


 
Other assets
 
$
19

Foreign exchange contracts
 
Other assets
 
78

 
Other liabilities
 
44

Option contracts
 

 


 
Other liabilities
 
9


Please see Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated Investment Products, at Fair Value for income from derivative contracts that is included in investment income by investment categories.

Note 7.  Debt

Certain Consolidated Investment Products employ leverage to finance their investments. The leverage primarily takes the form of a total return swap on selected assets. Interest under the total return swap includes an implicit interest rate based on LIBOR plus a range of 115 to 125 basis points with a maximum portfolio book value of $100.0 million, and minimum portfolio book values ranging from $35.0 million to $75.0 million, based on the number of days since the inception of the total return swap. As of March 31, 2013, interest was computed on the greater of the actual reference portfolio book value of $38.2 million or the then applicable minimum portfolio book value of $75.0 million under the total return swap agreement. The designated maturity of the total return swap is monthly and has a scheduled ramp-down after 18 months, which occurs in July 2013. The borrowing arrangement is currently collateralized by investments held in a reference portfolio. The counterparty to the swap is not obligated to offset portfolio risk by retaining or purchasing the underlying loans in the reference portfolio.

The fair value of the liability under the total return swap on our Consolidated Statement of Financial Position approximates its contract value as the debt is short-term with a floating interest rate and is categorized as Level 2.



Artio Global Investors Inc. First Quarter 2013 Form 10-Q 19



ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Note 8.  Share-Based Payments

In September 2009, the Board of Directors of Investors approved the Artio Global Investors Inc. 2009 Stock Incentive Plan (the “Plan”), and reserved 9.7 million shares of Class A common stock for share awards. Under the Plan, the Board of Directors is authorized to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards to directors, officers and other employees of, and consultants to, Investors and its affiliates.

Activity under the Plan has been as follows:
 
 
Units/Shares
Available for grant at inception
 
9,700,000

Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) granted, including dividend equivalents
 
(8,824,360
)
Fully vested restricted stock granted to independent directors
 
(162,100
)
RSUs forfeited, including dividend equivalents
 
1,059,839

Available for grant as of March 31, 2013
 
1,773,379

 


20 Artio Global Investors Inc. First Quarter 2013 Form 10-Q 


ARTIO GLOBAL INVESTORS INC. AND SUBISIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Certain of the RSUs we have granted have only service conditions, while others have performance or market conditions.

Awards Having Only Service Conditions
 
 
Weighted-Average
Grant Date Fair
Value
 
Number of RSUs and RSAs
 
RSU and RSA Dividend
Equivalents
Granted and unvested as of December 31, 2012(a)
 
$
15.32

 
1,924,744

 
112,251

Grants:
 
 
 
 
 
 
RSUs
 
2.00

 
2,678,401

 
 
Dividend equivalents
 
 
 
 
 

Vesting:
 
 
 
 
 
 
RSUs
 
10.16

 
(475,574
)
 
 
Dividend equivalents
 
 
 
 
 
(23,736
)
Forfeitures:
 
 
 
 
 
 
RSUs
 
2.01

 
(62,189
)
 
 
Dividend equivalents