Form 10-Q
Table of Contents

 

 

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 June 30, 2012

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

 

LOGO

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)

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant is required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

xYes   ¨ No

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   xYes  ¨ 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

As of July 31, 2012, there were 59,561,559 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.

 

 

 


Table of Contents

Artio Global Investors Inc.

Table of Contents

 

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

  Consolidated Statements of Financial Position as of June 30, 2012, and December 31, 2011

     2   

   Consolidated Statements of Operations for the three months and six months ended June 30, 2012 and 2011

     3   

  Consolidated Statements of Changes in Equity for the six months ended June 30, 2012 and 2011

     5   

  Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     6   

  Notes to Consolidated Financial Statements

     8   

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

     29   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4. Controls and Procedures

     46   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     46   

Item 1A. Risk Factors

     46   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     46   

Item 3. Defaults Upon Senior Securities

     46   

Item 4. Mine Safety Disclosures

     46   

Item 5. Other Information

     47   

Item 6. Exhibits

     47   

Signatures

     48   

 

1  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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)

       June 30, 2012        December 31, 2011

 ASSETS

         

 Cash

         $    62,169               $  110,252     

 Investments, at fair value:

         

 Artio Global funds held for deferred compensation

       10,142             10,211     

 Investments owned by the Consolidated Investment Products, and other
 seed money investments  (including $5,490 in 2012 and $0 in 2011
 pledged as collateral for debt)

       61,966             59,510     

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

       20,982             32,219     

 Deferred taxes

       192,863             195,700     

 Income taxes receivable

       15,820             12,756     

 Other assets

       20,110             13,121     
    

 

 

      

 

 

 

 Total assets

         $  384,052               $  433,769     
    

 

 

      

 

 

 

 LIABILITIES AND EQUITY

         

 Debt:

         

 Term loan

         $           —               $    37,500     

 The Consolidated Investment Products

       7,950             3,412     

 Accrued compensation and benefits

       14,406             35,530     

 Accounts payable and accrued expenses

       4,397             5,958     

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

       1,990             3,048     

 Accrued income taxes payable

       3,107             4,114     

 Due under tax receivable agreement

       156,276             162,061     

 Other liabilities

       5,974             3,878     
    

 

 

      

 

 

 

 Total liabilities

       194,100             255,501     
    

 

 

      

 

 

 

 Commitments and contingencies (Note 11)

         

 Common stock:

         

Class A common stock (500,000,000 shares authorized, 2012 -
 59,561,559 shares issued and outstanding; 2011 – 58,051,113 shares
 issued and outstanding)

       59             58     

 Class B common stock (50,000,000 shares authorized, 2012 – no shares
 issued and outstanding; 2011 – 1,200,000 shares issued and
outstanding)

       —             1     

 Additional paid-in capital

       641,264             629,553     

 Accumulated deficit

       (465,628)             (466,782)     
    

 

 

      

 

 

 

 Total stockholders’ equity

       175,695             162,830     

 Non-controlling interests in Holdings

       —             1,857     

 Non-controlling interests in the Consolidated Investment Products

       14,257             13,581     
    

 

 

      

 

 

 

 Total equity

       189,952             178,268     
    

 

 

      

 

 

 

 Total liabilities and equity

         $  384,052               $  433,769     

See accompanying notes to unaudited consolidated financial statements.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   2


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

      Three Months Ended June 30,

 (in thousands, except per share information)

   2012    2011

 Revenues and other operating income:

         

 Investment management fees

     $33,320           $78,209     

 Net losses on funds held for deferred compensation

     (546        (56  

 Foreign currency losses

     (60        (2  
  

 

 

  

 

 

 Total revenues and other operating income

     32,714           78,151     
  

 

 

  

 

 

 Expenses:

         

 Employee compensation and benefits

     19,417           25,812     

 Shareholder servicing and marketing

     3,043           5,163     

 General and administrative

     7,748           10,357     
  

 

 

  

 

 

 Total expenses

     30,208           41,332     
  

 

 

  

 

 

 Operating income before income tax expense

     2,506           36,819     

 Non-operating income (loss):

         

 The Consolidated Investment Products and other seed money
investments:

         

 Interest income

     803           728     

 Net losses

     (2,130        (290  

 Expenses

     (74        (70  
  

 

 

  

 

 

 Total

     (1,401        368     

 Interest expense

     (48        (501  

 Other income (loss)

     62           (23  
  

 

 

  

 

 

 Total non-operating loss

     (1,387        (156  
  

 

 

  

 

 

 Income before income tax expense

     1,119           36,663     

 Income taxes

     (287        14,869     
  

 

 

  

 

 

 Net income

     1,406           21,794     

 Net income attributable to non-controlling interests in Holdings

     12           719     

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

     (141        (75  
  

 

 

  

 

 

Net income attributable to Artio Global Investors

     $  1,535           $21,150     
  

 

 

  

 

 

 Per share information:

         

 Basic net income attributable to Artio Global Investors

     $    0.03           $    0.36     
  

 

 

  

 

 

 Diluted net income attributable to Artio Global Investors

     $    0.03           $    0.36     
  

 

 

  

 

 

 Weighted average shares used to calculate per share information:

         

 Basic

     59,213           58,393     
  

 

 

  

 

 

 Diluted

     59,814           58,577     
  

 

 

  

 

 

 Dividends per basic share declared

     $    0.02           $    0.06     

 

See accompanying notes to unaudited consolidated financial statements.

 

3  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

      Six Months Ended June 30,

 (in thousands, except per share information)

   2012    2011

 Revenues and other operating income:

             

 Investment management fees

           $  76,091                $159,985    

 Net gains on funds held for deferred compensation

       614            363    

 Foreign currency losses

       (61 )          (20 )  
    

 

 

      

 

 

 

 Total revenues and other operating income

       76,644            160,328    
    

 

 

      

 

 

 

 Expenses:

             

 Employee compensation and benefits

       41,751            53,830    

 Shareholder servicing and marketing

       6,667            10,028    

 General and administrative

       17,486            20,529    
    

 

 

      

 

 

 

 Total expenses

       65,904            84,387    
    

 

 

      

 

 

 

 Operating income before income tax expense

       10,740            75,941    

 Non-operating income (loss):

             

 The Consolidated Investment Products and other seed money
investments:

             

 Interest income

       1,737            1,295    

 Net gains (losses)

       (49 )          242    

 Expenses

       (87 )          (79 )  
    

 

 

      

 

 

 

 Total

       1,601            1,458    

 Interest expense

       (483 )          (1,027 )  

 Other income (expense)

       51            (22 )  
    

 

 

      

 

 

 

 Total non-operating income

       1,169            409    
    

 

 

      

 

 

 

 Income before income tax expense

       11,909            76,350    

 Income taxes

       5,035            31,620    
    

 

 

      

 

 

 

 Net income

       6,874            44,730    

 Net income attributable to non-controlling interests in Holdings

       202            1,488    

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

       537            60    
    

 

 

      

 

 

 

 Net income attributable to Artio Global Investors

       $    6,135            $  43,182    
    

 

 

      

 

 

 

 Per share information:

             

 Basic net income attributable to Artio Global Investors

       $      0.10            $      0.74    
    

 

 

      

 

 

 

 Diluted net income attributable to Artio Global Investors

       $      0.10            $      0.74    
    

 

 

      

 

 

 

 Weighted average shares used to calculate per share information:

             

 Basic

       58,703            58,373    
    

 

 

      

 

 

 

 Diluted

       58,992            58,475    
    

 

 

      

 

 

 

 Dividends per basic share declared

           $      0.08                  $      0.12      

See accompanying notes to unaudited consolidated financial statements.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   4


Table of Contents

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)    
   Class C
Common
Stock

(par value
  $0.01)  
   Additional
Paid-in
Capital
   Accum-
ulated
  (Deficit)  
   Stock-
holders’
    Equity     
   Non-
controlling
Interests in
  Holdings  
   Non-
controlling
Interests in
the
Consoli-
dated
Investment
  Products  
   Total
    Equity    

 Balance as of
 January 1, 2011

           $  42                $  1                 $ 168            $613,065              $(509,629)             $103,647             $1,505              $1,131              $106,283      

 Net income

       —            —            —            —              43,182              43,182             1,488              60              44,730      

 Share-based
payments:

                                            

 Directors’ awards

       —            —            —            311              —               311             —              —              311      

 Amortization

       —            —            —            9,096              —               9,096             —              —              9,096      

 Forfeiture

       —            —            —            (1)             —               (1)            —              —              (1)     

 Dividend
 equivalents

       —            —            —            517              (517)             —             —              —              —      

 Capital contributions
 from non-
 controlling
 interests

       —            —            —            —              —              —             —              11,265             11,265      

 Distribution to non-
 controlling
 interests

       —            —            —            —              —              —             (1,361)             —              (1,361)     

 Cash dividends paid
 ($0.12 per share)

       —            —            —            —              (7,006)             (7,006)            —              —              (7,006)     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 Balance as of
 June 30, 2011

       $  42            $  1                 $ 168            $622,988              $(473,970)             $149,229             $1,632              $12,456              $163,317      
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 Balance as of
 January 1, 2012

       $  58            $  1            $ —            $629,553              $(466,782)             $162,830             $1,857              $13,581              $178,268      

 Net income

       —            —            —            —              6,135              6,135             202              537              6,874      

 Holdings units
 exchanged for
 Class A common
 stock and
 cancelation of
 Class B common
 stock (see Note 2)

       1            (1)            —            1,763              —              1,763             (1,763)             —              —      

 Net benefit from step-
 up in tax basis

       —            —            —            210              —              210             —              —              210      

 Share-based
 payments:

                                            

 Directors’ awards

       —            —            —            240             —             240            —             —             240     

 Amortization

       —            —            —            9,379              —              9,379             —              —              9,379      

 Forfeitures

       —            —            —            (176)             —              (176)            —              —              (176)     

 Dividend
equivalents

       —            —            —            295              (295)             —              —              —              —      

 Capital contributions
 from non-
 controlling
 interests

       —            —            —            —              —              —              —              139              139      

 Distribution to non-
 controlling
 interests

       —            —            —            —              —              —              (296)             —              (296)     

 Cash dividends paid
 ($0.08 per share)

       —            —            —            —              (4,686)             (4,686)            —              —              (4,686)     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 Balance as of
 June 30, 2012

       $  59            $  —            $  —            $641,264              $(465,628)             $175,695             $  —             $14,257              $189,952      
                                                                                                    

See accompanying notes to unaudited consolidated financial statements.

 

5  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

        Six Months Ended June 30,  

 (in thousands)

   2012    2011

 Cash flows from operating activities:

             

 Net income

       $      6,874            $  44,730    

 Adjustments to reconcile net income to net cash provided by (used in)
 operating activities:

             

 Depreciation and amortization

       1,209            1,271    

 Deferred compensation

       3,546            3,388    

 Share-based compensation

       9,443            9,406    

 Deferred income taxes

       4,243            2,446    

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

       (111 )          (100 )  

 Gains on investments and derivatives

       (604 )          (605 )  

 Changes in assets and liabilities:

             

 Purchases by the Consolidated Investment Products and of other seed
 money investments

       (30,491 )          (77,912 )  

 Proceeds from sales or maturities by the Consolidated Investment
 Products and from other seed money investments

       27,080            41,239    

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

       11,239            5,807    

 Income taxes receivable

       (3,064 )          (3,520 )  

 Other assets

       (7,946 )          (1,888 )  

 Debt of the Consolidated Investment Products

       (952 )             

 Accrued compensation and benefits

       (24,670 )          (21,333 )  

 Accounts payable and accrued expenses

       (1,500 )          (517 )  

 Accrued income taxes payable

       (1,007 )          (1,051 )  

 Due under tax receivable agreement

       (6,981 )          (4,966 )  

 Other liabilities

       2,095            2,009    
    

 

 

      

 

 

 

 Net cash used in operating activities

       (11,597 )          (1,596 )  
    

 

 

      

 

 

 

 Cash flows from investing activities:

             

 Purchase of Artio Global funds held for deferred compensation

       (4,401 )          (7,115 )  

 Proceeds from redemptions of Artio Global funds held for deferred
 compensation

       5,084            4,707    

 Purchase of fixed assets

       (255 )          (1,109 )  
    

 

 

      

 

 

 

 Net cash provided by (used in) investing activities

       428            (3,517 )  
    

 

 

      

 

 

 

 Cash flows from financing activities:

             

 Repayments of borrowing under term credit facility

       (37,500 )          (9,000 )  

 Borrowings under the total return swap

       5,490               

 Distributions paid to non-controlling interests in Holdings

       (296 )          (1,361 )  

 Contributions from non-controlling interests in the Consolidated Investment
 Products

       139            11,265    

 Cash dividends paid

       (4,686 )          (7,006 )  
    

 

 

      

 

 

 

 Net cash used in financing activities

       (36,853 )          (6,102 )  
    

 

 

      

 

 

 

 Effect of exchange rates on cash

       (61 )          (20 )  
    

 

 

      

 

 

 

 Net decrease in cash

       (48,083 )          (11,235 )  

 Cash:

             

 Beginning of period

       110,252            80,043    
    

 

 

      

 

 

 

 End of period

     $   62,169          $   68,808    
    

 

 

      

 

 

 

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   6


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ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

      Six Months Ended June 30,

(in thousands)

   2012    2011

 Cash paid during period for:

         

 Income taxes, net of refunds

       $  4,892          $ 33,772  

 Interest expense

       310          1,243  

 Supplementary information:

         

 Deferred taxes from step-up in tax basis

       $  1,406           

See accompanying notes to unaudited consolidated financial statements.

 

7  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Background and Basis of Presentation

Artio Global Investors Inc. (“Investors” or the “Company”) and subsidiaries (collectively, “we,” “us” or “our”) comprises Investors and its 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 is licensed as a limited-purpose broker-dealer; 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 April 2012, Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer (“Pell”), and Rudolph-Riad Younes, our Head of International Equity (“Younes,” together with Pell, the “Principals”) exchanged their remaining interests in Holdings for an equal amount of shares of Investors’ Class A common stock, leaving Holdings as a wholly owned subsidiary (see Note 2. Stockholders’ Equity). Prior to the exchange, Holdings was approximately 98% owned by Investors and 1% owned by each of the Principals. The Principals’ interests were reflected in the consolidated financial statements as Non-controlling interests in Holdings.

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 at the date of the consolidated financial statements. Actual results could differ from those estimates and may have a material effect on the consolidated financial statements.

Certain comparative amounts for prior periods have been reclassified to conform to the current period’s presentation.

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 and Net income can vary significantly from quarter to quarter due to the nature of our business activities. The financial results of interim periods may not be indicative of the financial results for the entire year.

As part of the preparation of the interim consolidated financial statements, we performed an evaluation of subsequent events occurring after the Consolidated Statement of Financial Position date of June 30, 2012, 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, 2011, and for the three years then ended, included in our 2011 Annual Report on Form 10-K.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q  8


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 2. Stockholders’ Equity

The table below sets forth the number of shares of Class A and Class B common stock issued and outstanding as of December 31, 2011, and June 30, 2012.

 

  (in thousands)

   Class A
  Common Stock  
   Class B
 Common Stock 

  As of December 31, 2011

               58,051                      1,200       

  Activity:

         

  Exchange by the Principals(a)

       1,200              (1,200)       

  Restricted stock units vested

       233              —       

  Shares issued to independent directors(b)

       78              —       
    

 

 

      

 

 

 

  As of June 30, 2012(c)

       59,562              —       

 

(a) Represents the issuance of 600,000 shares of Class A common stock to each of the Principals upon exchange of an equivalent number of non-voting member interests in Holdings (“New Class A Units”) in April 2012. Upon the exchange of New Class A Units for Class A common stock, a corresponding number of shares of Class B common stock were canceled. This exchange represented the Principals’ remaining interest in Holdings.
(b) Represents 78,432 shares of fully-vested Class A common stock (subject to transfer restrictions) that were awarded to our independent directors in the first six months of 2012.
(c) The table does not reflect 4.6 million unvested restricted stock units and restricted stock awarded to certain employees as of June 30, 2012 (see Note 8. Share-Based Payments). Each restricted stock unit or share of restricted stock represents the right to receive one share of unrestricted Class A common stock upon vesting.

As of June 30, 2012 and December 31, 2011, there were 210 million shares of Investors’ Class C common stock authorized and no shares issued or outstanding.

In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our common stock. This authority expires on December 31, 2013. As of June 30, 2012, we may purchase up to an aggregate of 2,226,061 shares of our Class A common stock through December 31, 2013.

Note 3. Consolidated Investment Products

From time to time, we make seed money investments in the investment 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 operations are included in Non-operating income (loss) in the Consolidated Statement of Operations.

 

9  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A condensed consolidating statement of financial position as of June 30, 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

         $      59,899                $    2,270                $          —                    $    62,169       

Investments, at fair value

     13,204                58,904            —                72,108       

Investment in the Consolidated Investment
Products

     44,211                      (44,211)              —       

Other assets

     238,114                11,661            —                249,775       
  

 

 

  

 

 

  

 

 

  

 

 

Total assets

         $    355,428                $  72,835                $  (44,211)                  $  384,052       
  

 

 

  

 

 

  

 

 

  

 

 

Liabilities and Equity:

                       

Debt

     $             —                $    7,950                $          —                    $      7,950       

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

     —                1,990            —                1,990       

Other liabilities

     179,733                4,427            —                184,160       
  

 

 

  

 

 

  

 

 

  

 

 

Total liabilities

     179,733                14,367            —                194,100       
  

 

 

  

 

 

  

 

 

  

 

 

Members’ equity

           31,802            (31,802)              —       

Net asset value

           26,666            (26,666)              —       

Common stock

     59                      —                59       

Additional paid-in capital

     641,264                      —                641,264       

Accumulated deficit

     (465,628)                    —                (465,628)      
  

 

 

  

 

 

  

 

 

  

 

 

Total stockholders’ equity

     175,695                58,468            (58,468)              175,695       

Non-controlling interests

     —                      14,257               14,257       
  

 

 

  

 

 

  

 

 

  

 

 

Total equity

     175,695                58,468            (44,211)              189,952       
  

 

 

  

 

 

  

 

 

  

 

 

Total liabilities and equity

         $    355,428                  $  72,835                  $  (44,211)                    $  384,052         

 

(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. Second Quarter 2012 Form 10-Q   10


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A condensed consolidating statement of financial position as of December 31, 2011, 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

     $ 108,518           $  1,734            $        —           $ 110,252     

Investments, at fair value

     13,199           56,522                      69,721     

Investment in the Consolidated Investment
Products

     40,088                      (40,088            

Other assets

     250,075           3,721                      253,796     
  

 

 

  

 

 

  

 

 

  

 

 

Total assets

     $ 411,880           $61,977          $ (40,088        $ 433,769     
  

 

 

  

 

 

  

 

 

  

 

 

Liabilities and Equity:

                    

Debt

     $   37,500           $  3,412            $        —           $   40,912     

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

               3,048                      3,048     

Other liabilities

     209,693           1,848                      211,541     
  

 

 

  

 

 

  

 

 

  

 

 

Total liabilities

     247,193           8,308                      255,501     
  

 

 

  

 

 

  

 

 

  

 

 

Members’ equity

          30,567            (30,567            

Net asset value

          23,102            (23,102            

Common stock

     59                           59     

Additional paid-in capital

     629,553                           629,553     

Accumulated deficit

     (466,782                        (466,782  
  

 

 

  

 

 

  

 

 

  

 

 

Total stockholders’ equity

     162,830           53,669            (53,669        162,830     

Non-controlling interests

     1,857                 13,581           15,438     
  

 

 

  

 

 

  

 

 

  

 

 

Total equity

     164,687           53,669            (40,088        178,268     
  

 

 

  

 

 

  

 

 

  

 

 

Total liabilities and equity

     $ 411,880             $61,977            $ (40,088          $ 433,769       

 

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

 

11  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A condensed consolidating statement of operations for the three months ended June 30, 2012 and 2011, 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 June 30, 2012:

               

Total revenues and other operating income

    $32,698              $    —          $      16          $32,714     

Total expenses

    30,208                            30,208     
 

 

 

 

 

 

 

 

 

 

 

 

Operating income before income tax
expense

    2,490                   16          2,506     

Non-operating income (loss):

               

Equity in earnings of the Consolidated
Investment Products

    (758           758              

Other

    (472       (899       (16       (1,387  
 

 

 

 

 

 

 

 

 

 

 

 

Total non-operating income (loss)

    (1,230       (899       742          (1,387  
 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

    1,260          (899       758          1,119     

Income taxes

    (287                         (287  
 

 

 

 

 

 

 

 

 

 

 

 

Net income

    1,547          (899       758          1,406     

Net income (loss) attributable to non-
controlling interests

    12                   (141       (129  
 

 

 

 

 

 

 

 

 

 

 

 

Net income, excluding non-controlling
interests

    $ 1,535          $ (899       $   899          $  1,535     
 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2011:

               

Total revenues and other operating income

    $78,128          $    —          $     23          $78,151     

Total expenses

    41,332                            41,332     
 

 

 

 

 

 

 

 

 

 

 

 

Operating income before income tax
expense

    36,796                   23          36,819     

Non-operating income (loss):

               

Equity in earnings of the Consolidated
Investment Products

    543                   (543           

Other

    (601       468          (23       (156  
 

 

 

 

 

 

 

 

 

 

 

 

Total non-operating income (loss)

    (58       468          (566       (156  
 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

    36,738          468          (543       36,663     

Income taxes

    14,869                            14,869     
 

 

 

 

 

 

 

 

 

 

 

 

Net income

    21,869          468          (543       21,794     

Net income attributable to non-controlling
interests

    719                   (75       644     
 

 

 

 

 

 

 

 

 

 

 

 

Net income, excluding non-controlling
interests

    $21,150            $  468            $(468         $21,150       

 

(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. Second Quarter 2012 Form 10-Q   12


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A condensed consolidating statement of operations for the six months ended June 30, 2012 and 2011, 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 six months ended June 30, 2012:

               

Total revenues and other operating income

    $    76,602          $        —          $          42          $    76,644     

Total expenses

    65,904                            65,904     
 

 

 

 

 

 

 

 

 

 

 

 

Operating income before income tax
expense

    10,698                   42          10,740     

Non-operating income (loss):

               

Equity in earnings of the Consolidated
Investment Products

    1,125              (1,125           

Other

    (451       1,662          (42       1,169     
 

 

 

 

 

 

 

 

 

 

 

 

Total non-operating income (loss)

    674          1,662          (1,167       1,169     
 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

    11,372          1,662          (1,125       11,909     

Income taxes

    5,035                            5,035     
 

 

 

 

 

 

 

 

 

 

 

 

Net income

    6,337          1,662          (1,125       6,874     

Net income attributable to non-controlling
interests

    202                   537          739     
 

 

 

 

 

 

 

 

 

 

 

 

Net income, excluding non-controlling
interests

    $      6,135          $    1,662          $   (1,662       $      6,135     
 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2011:

               

Total revenues and other operating income

    $  160,305          $         —          $          23          $  160,328     

Total expenses

    84,387                            84,387     
 

 

 

 

 

 

 

 

 

 

 

 

Operating income before income tax
expense

    75,918                   23          75,941     

Non-operating income (loss):

               

Equity in earnings of the Consolidated
Investment Products

    1,326                   (1,326           

Other

    (954       1,386          (23       409     
 

 

 

 

 

 

 

 

 

 

 

 

Total non-operating income (loss)

    372          1,386          (1,349       409     
 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

    76,290          1,386          (1,326       76,350     

Income taxes

    31,620                            31,620     
 

 

 

 

 

 

 

 

 

 

 

 

Net income

    44,670          1,386          (1,326       44,730     

Net income attributable to non-controlling
interests

    1,488                   60          1,548     
 

 

 

 

 

 

 

 

 

 

 

 

Net income, excluding non-controlling interests

    $    43,182            $    1,386            $   (1,386         $    43,182       

 

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

 

13  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A condensed consolidating statement of cash flows for the six months ended June 30, 2012 and 2011, including amounts 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 six months ended June 30, 2012:

               

Net cash provided by (used in) operating
activities

    $    (6,506       $    (8,091       $      3,000          $    (11,597  

Net cash provided by investing activities

    428                            428     

Net cash provided by (used in) financing
activities

    (42,480       8,627          (3,000       (36,853  

Effect of exchange rates on cash

    (61                         (61  
 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

    (48,619       536                   (48,083  

Cash - beginning of period

    108,518          1,734                   110,252     
 

 

 

 

 

 

 

 

 

 

 

 

Cash - end of period

    $    59,899          $      2,270          $          —          $    62,169     
 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2011:

               

Net cash provided by (used in) operating
activities

    $      9,554          $  (33,150       $   22,000          $    (1,596  

Net cash used in investing activities

    (3,517                         (3,517  

Net cash provided by (used in) financing
activities

    (17,367       33,265          (22,000       (6,102  

Effect of exchange rates on cash

    (20                         (20  
 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

    (11,350       115                   (11,235  

Cash - beginning of period

    79,232          811                   80,043     
 

 

 

 

 

 

 

 

 

 

 

 

Cash - end of period

    $    67,882            $        926            $          —            $    68,808       

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 June 30,        Six Months Ended June 30,  

(in thousands)

   2012    2011    2012    2011

 Funds’ investment management fees

      $  20,458               $  44,978               $  45,295               $  91,447        

 Sub-advisory investment management fees on
GAM-sponsored funds

     394                774                761                1,415          

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   14


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Fees receivable related to investment management fees are included in Fees receivable and accrued fees, net of allowance for doubtful accounts in the Consolidated Statement of Financial Position as follows:

 

      As of

(in thousands)

   June 30,
       2012      
     December 31,
      2011      

 Funds’ investment management fees

       $    6,011             $    8,919        

 Sub-advisory investment management fees on GAM-sponsored funds

     415           397          

Tax Receivable Agreement

We have a tax receivable agreement that requires us to share certain tax benefits with our Principals. During the second quarter of 2012, the Principals exchanged their remaining interests in Holdings, which allowed us to make an election to step up our tax basis in accordance with Section 754 of the Internal Revenue Code of 1986, as amended. The Principals’ share of the tax benefit was recorded in Due under tax receivable agreement on the Consolidated Statement of Financial Position.

During the six months ended June 30, 2012, we made an aggregate payment of approximately $7.0 million to the Principals pursuant to this agreement towards the liability relating to the 2011 tax returns.

Other Related Party Transactions

Investors sponsors the non-contributory qualified defined contribution retirement 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

In 2012, 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 other seed money investments and the cash collateral we received under the terms of the swap is included as a collateralized loan in Debt: The Consolidated Investment Products in the Consolidated Statement of Financial Position. Subsequent purchases under the total return swap are accounted for as off-balance sheet derivatives.

 

15  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Investments, at fair value, as of June 30, 2012, and December 31, 2011, consist of the following:

 

 

     As of

(in thousands)

   June 30,
2012
  December 31,
    2011    

Artio Global funds held for deferred compensation:

        

Artio Global funds

         $10,142          $10,211     
  

 

 

 

 

 

Total Artio Global funds held for deferred compensation

         $10,142          $10,211     
  

 

 

 

 

 

Investments owned by the Consolidated Investment Products, and other seed
money investments:

        

Investments owned by the Consolidated Investment Products:

        

Equity securities

     $   6,149          $  1,979     

Fixed income investments:

        

Corporate bonds

     21,165          23,205     

Sovereign and international financial organization debt

     15,295          14,207     

Term loans(a)

     12,210          13,961     

Warrants

     102          111     

Resell agreements

     3,983          3,059     
  

 

 

 

 

 

Total investments owned by the Consolidated Investment Products

     58,904          56,522     
  

 

 

 

 

 

Other seed money investments:

        

Equity fund

     1,823          1,822     

Equity securities

     1,239          1,166     
  

 

 

 

 

 

Total other seed money investments

     3,062          2,988     
  

 

 

 

 

 

Total investments owned by the Consolidated Investment Products, and other
seed money investments

     $ 61,966          $59,510     
  

 

 

 

 

 

Investments sold, not yet purchased by the Consolidated Investment Products:

        

Corporate bonds

     $ (1,990       $ (3,048  
  

 

 

 

 

 

Total investments sold, not yet purchased by the Consolidated Investment
Products

     $ (1,990         $ (3,048    

 

(a) Includes $8.6 million of investments, that are held by a counterparty to a total return swap. The counterparty to the swap is not obligated to hold the investments and may dispose of them. In determining the fair values of the assets subject to the swap, we consider the creditworthiness of the counterparty to the swap. The collateralized loan associated with the swap outstanding as of June 30, 2012, was $5.5 million and is included in Debt: The Consolidated Investment Products in the Consolidated Statement of Financial Position.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   16


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Net gains (losses) for the three and six months ended June 30, 2012 and 2011, are as follows:

 

 

     Three Months Ended June 30,    Six Months Ended June 30,

(in thousands)

   2012    2011    2012        2011    

Net gains on Artio Global funds held for
deferred compensation

     $   (546        $  (56        $    614           $ 363     

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

     (16        19           537           848     
  

 

 

  

 

 

  

 

 

  

 

 

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

     $   (530        $  (75        $      77           $(485  
  

 

 

  

 

 

  

 

 

  

 

 

Net gains (losses) – the Consolidated Investment
Products and other seed money investments:

                   

Net gains on investments of the Consolidated
Investment Products

     $(1,721        $(198        $  (106        $ 144     

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

     (769        106           (1,917        260     
  

 

 

  

 

 

  

 

 

  

 

 

Unrealized gains (losses) on investments of
the Consolidated Investment Products

     $   (952        $(304        $1,811           $(116  
  

 

 

  

 

 

  

 

 

  

 

 

Net gains on other seed money investments

     $   (409        $  (92        $     57           $   98     

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

     16           63           31           185     
  

 

 

  

 

 

  

 

 

  

 

 

Unrealized gains on other seed money
investments

     $   (425        $(155        $     26           $  (87  
  

 

 

  

 

 

  

 

 

  

 

 

Total net gains – the Consolidated Investment
Products and other seed money investments

     $(2,130        $(290        $    (49        $ 242     

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

     (753        169           (1,886        445     
  

 

 

  

 

 

  

 

 

  

 

 

Total unrealized gains (losses) on the
Consolidated Investment Products and other
seed money investments

     $(1,377          $(459          $1,837             $(203    

 

17  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Consolidated Investment Products’ investment income, including income from derivative contracts, is recorded in Non-operating income (loss): 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 June 30,    Six Months Ended June 30,

(in thousands)

   2012    2011    2012    2011

Equity securities

  

 

$   (549

       $(318        $(351        $(224  

Fixed income investments:

                   

Corporate bonds

     (935        145           (40        550     

Sovereign and international financial
organization debt

     (449        253           459           253     

Term loans

     (376        121           44           144     

Warrants

     (57        (43        (10        (43  

Total return swap

     396                     396               

Credit default swaps

     521           98                     (50  

Foreign exchange contracts

     (261        (335        (397        (355  

Options

     (17        (199        (207        (200  

Other

     6           80                     69     
  

 

 

  

 

 

  

 

 

  

 

 

Total net gains (losses) – the Consolidated
Investment Products

     $(1,721          $(198          $(106          $ 144       

Unrealized gains are included in Non-operating income (loss): The Consolidated Investment Products and other seed money investments: Net gains in the Consolidated Statement of Operations.

Fair Value

We carry our investments portfolio at fair value using a valuation hierarchy based on the transparency of the inputs to the valuation techniques used to measure fair value. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels: (i) valuation inputs comprising unadjusted quoted market prices for identical assets or liabilities in active markets (“Level 1”); (ii) valuation inputs comprising quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (“Level 2”); and (iii) valuation inputs that are unobservable and are significant to the fair value measurement (“Level 3”). Unobservable inputs are inputs that reflect our own assumptions about the assumptions participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. We also classify investments as Level 3 if fair value is obtained from third party pricing services with a single non-binding broker quote as the underlying valuation source.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   18


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Our investments as of June 30, 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

         $10,142                 $10,142                $           $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Total Artio Global funds held for deferred
compensation

         $10,142                 $10,142                $           $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Investments owned by the Consolidated
Investment Products, and other seed money
investments:

                     

Investments owned by the Consolidated
Investment Products:

                     

Equity securities

         $  6,149                 $  4,737                $ 833           $     579      

Fixed income investments:

                     

Corporate bonds

     21,165                      20,995           170      

Sovereign and international financial
organization debt

     15,295                      15,295                

Term loans

     12,210                      11,221           989      

Warrants

     102           102                           

Resell agreements

     3,983                      3,983                
  

 

 

  

 

 

  

 

 

  

 

 

Total investments owned by the Consolidated
Investment Products

     58,904           4,839            52,327           1,738      
  

 

 

  

 

 

  

 

 

  

 

 

Other seed money investments:

                     

Equity fund

     1,823           1,823                           

Equity securities

     1,239           1,239                           
  

 

 

  

 

 

  

 

 

  

 

 

Total other seed money investments

     3,062           3,062                           
  

 

 

  

 

 

  

 

 

  

 

 

Total investments owned by the Consolidated
Investment Products, and other seed money
investments

     $61,966                 $  7,901                $ 52,327           $1,738      
  

 

 

  

 

 

  

 

 

  

 

 

Investments sold, not yet purchased by the
Consolidated Investment Products:

                     

Fixed income investments:

                     

Corporate bonds

     $ (1,990              $       —                $  (1,990        $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Total investments sold, not yet purchased by
the Consolidated Investment Products

     $ (1,990              $       —                $  (1,990        $     —      
                             

 

19  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Our investments as of December 31, 2011, 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

         $10,211                   $10,211           $      —           $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Total Artio Global funds held for deferred
compensation

         $10,211           $10,211           $      —           $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Investments owned by the Consolidated
Investment Products, and other seed money
investments:

                    

Investments owned by the Consolidated
Investment Products:

                    

Equity securities

     $  1,979           $  1,927           $      —           $     52      

Fixed income investments:

                    

Corporate bonds

     23,205           279           22,513           413      

Sovereign and international financial
organization debt

     14,207                     14,207                

Term loans

     13,961                     13,014           947      

Warrants

     111           111                          

Resell agreements

     3,059                     3,059                
  

 

 

  

 

 

  

 

 

  

 

 

Total investments owned by the Consolidated
Investment Products

     56,522           2,317           52,793           1,412      
  

 

 

  

 

 

  

 

 

  

 

 

Other seed money investments:

                    

Equity fund

     1,822           1,822                          

Equity securities

     1,166           1,166                          
  

 

 

  

 

 

  

 

 

  

 

 

Total other seed money investments

     2,988           2,988                          
  

 

 

  

 

 

  

 

 

  

 

 

Total investments owned by the Consolidated
Investment Products, and other seed money
investments

     $59,510           $  5,305                 $52,793           $1,412      
  

 

 

  

 

 

  

 

 

  

 

 

Investments sold, not yet purchased by the
Consolidated Investment Products:

                    

Corporate bonds

     $ (3,048        $   (810             $ (2,238        $     —      
  

 

 

  

 

 

  

 

 

  

 

 

Total investments sold, not yet purchased by
the Consolidated Investment Products

     $ (3,048          $   (810                $ (2,238          $     —        

Derivative contracts, which are included in Other assets and Other liabilities in 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. Second Quarter 2012 Form 10-Q   20


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Changes during the six months ended June 30, 2012 and 2011, in Level 3 securities are as follows:

 

 

     As of

(in thousands)

   June 30, 2012    June 30, 2011

Equity securities owned by the Consolidated Investment Products:

         

Beginning of period

           $ 52                 $ 146     

Purchases

     560               

Net losses during the period

     (33        (38  
  

 

 

  

 

 

End of period

           $ 579                 $ 108     
  

 

 

  

 

 

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

           $ (33              $ (38  
  

 

 

  

 

 

Corporate bonds owned by the Consolidated Investment Products:

         

Beginning of period

           $ 413                 $     

Purchases

     10           693     

Sales

     (41        (47  

Net gains (losses) during the period

     (212        19     
  

 

 

  

 

 

End of period

           $ 170                 $ 665     
  

 

 

  

 

 

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

           $ (212              $ 19     
  

 

 

  

 

 

Term loans owned by the Consolidated Investment Products:

         

Beginning of period

           $ 947                 $ 955     

Purchases

     999           2,466     

Sales

     (967        (762  

Transfers to level 2

               (118  

Amortization

     19           9     

Net gains (losses) during the period

     (9        (7  
  

 

 

  

 

 

End of period

           $ 989                 $ 2,543     
  

 

 

  

 

 

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

           $ (21                $ 1       

During the six months ended June 30, 2011, $0.1 million in term loans were transferred from Level 3 to Level 2, 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 June 30, 2012, they did not revalue any loans.

 

21  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The values of other securities designated as Level 3 are based on our own computations. Valuation techniques and inputs used in the fair value measurement of these securities are as follows:

 

(in thousands, except percentages)

   Fair  Value
as of
  June 30, 2012  
         Valuation Technique         Unobservable Input      Range
(Weighted
Average)

Equity security

           $ 555         Internal model(a)   Market

adjustments

   N/A

Corporate bond

     170         Market adjusted

last available

trade(b)

  Market

adjustments

   N/A

 

N/A – Not applicable.
(a) Valuation is based upon the last available price for the corresponding debt security, multiplied by the debt to equity conversion ratio, and if necessary, adjusted for market price movements.
(b) The corporate bond no longer has an active market. Fair value is estimated based upon the last available price, and if necessary, adjusted for market price movements.

Total Level 3 securities are as follows:

 

(in thousands)

  As of
June 30, 2012
 

Single quote investments (term loans)

    $   989       

Internal valuations

    725       

Other equity securities

    24       
 

 

 

 

Total Level 3 securities

    $1,738       

Note 6. Derivative Contracts

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

 

 

 
     Notional/Nominal Amount as of      Average Notional/Nominal  Amount
Outstanding for the
Six Months Ending
 

(in thousands)

   June 30, 2012      December 31,
2011
     June 30, 2012      June 30, 2011  

Credit default swaps

       $ 48,165               $ 14,450                 $ 33,221                 $  5,300       

Total return swap

     28,398             —               22,123             —       

Foreign exchange contracts

     9,843             27,250               14,025             11,179       

Option contracts

     20             5,957               2,711             9,533       

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   22


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair value of derivative contracts as of June 30, 2012, and December 31, 2011, is as follows:

 

 

     Assets      Liabilities

(in thousands)

   Statement of
  Financial  Position  
Location
   Fair Value      Statement of
   Financial Position  
Location
         Fair Value    

As of June 30, 2012:

           

Credit default swaps

   Other assets            $ 792                 

Foreign exchange contracts

   Other assets      4                 Other liabilities            $12    

Option contracts

   Other assets      20                 

As of December 31, 2011:

           

Credit default swaps

   Other assets            $ 993                 

Foreign exchange contracts

   Other assets      272                 Other liabilities            $80    

Option contracts

   Other assets      93                         

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

Credit Facilities

On March 29, 2012, Holdings prepaid the outstanding balance of $37.5 million borrowed under a $60.0 million term credit facility and terminated both the term credit facility and a $100.0 million revolving credit facility. Both the term credit facility and the revolving credit facility would have matured in October 2012.

Consolidated Investment Products

Certain Consolidated Investment Products employ leverage to finance their investments. The leverage takes the form of a prime brokerage arrangement or is provided by a total return swap on selected assets. Interest on the prime brokerage arrangement is payable at the Fed Funds rate plus a range of 40 to 125 basis points; and 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 June 30, 2012, interest was computed on the greater of the actual reference portfolio book value of $37.0 million or the then applicable minimum portfolio book value of $50.0 million under the total return swap agreement. The minimum portfolio book value increases to $75 million in the fourth quarter of 2012. The designated maturity of the total return swap is monthly and has a scheduled ramp-down after 18 months. Both borrowing arrangements are currently collateralized by investments held at the lending bank. In the case of the total return swap, the counterparty to the swap is not obligated to offset portfolio risk by retaining or purchasing the underlying loans. Accordingly, our pricing procedures consider the effect of counterparty risk when assigning fair values to our investments.

 

23  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8. Share-Based Payments

Activity under the Artio Global Investors Inc. 2009 Stock Incentive Plan (the “Plan”) was as follows:

 

 

 

 

               Units/Shares               

Available for grant at inception

     9,700,000            

Restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) granted, including dividend equivalents

     (6,076,588)           

Fully-vested restricted stock granted to independent directors

     (122,299)           

RSUs forfeited, including dividend equivalents

     260,656            
  

 

 

 

Available for grant as of June 30, 2012

     3,761,769            

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, 2011

           $ 22.02            1,822,079           66,562         

Grants:

             

RSUs and RSAs

     4.42            875,143        

Dividend equivalents

                47,319         

Vesting:

             

RSUs

     17.62            (225,157     

Dividend equivalents

                (6,909)        

Forfeitures:

             

RSUs

     18.50            (54,171     

Dividend equivalents

                (2,204)        
        

 

 

  

 

 

 

Granted and unvested as of June 30, 2012

     16.99            2,417,894               104,768         
        

 

 

  

 

 

 

Granted and unvested as of December 31, 2010

     25.70            1,856,997           27,225         

Grants:

             

RSUs

     14.81            450,976        

Dividend equivalents

                18,554         

Vesting:

             

RSUs

     23.08            (76,835     

Dividend equivalents

                (1,144)        

Forfeitures:

             

RSUs

     25.49            (3,029     

Dividend equivalents

                (57)        
        

 

 

  

 

 

 

Granted and unvested as of June 30, 2011

     23.72              2,228,109             44,578         

Compensation expense related to awards with only service conditions is recognized using a straight-line method over the requisite service period (generally a three- or five-year period from the date of the grant for the entire award), unless an award meets retirement eligibility requirements. Compensation expense related to the amortization of RSU and RSA grants is included in Employee compensation and benefits in the Consolidated Statement of Operations and was $3.7 million for the three months ended June 30, 2012 and 2011. Compensation expense related to the amortization of RSU and RSA grants was $7.2 million for the six months ended June 30, 2012 and 2011.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   24


Table of Contents

ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Awards Having Performance or Market Conditions

Awards issued pursuant to the long-term incentive program (the “LTIP”) are in the form of RSUs and granted pursuant to the overall Plan. The LTIP awards are subject to either performance- or market-based conditions. The conditions of the performance-based awards correspond with the responsibilities of the recipients and are linked to either investment performance or sales targets, while the condition associated with the market-based awards relates to increasing the price/earnings multiple of our Class A common stock as compared to our peer group. The LTIP awards have three-year cliff vesting. The fair value of the awards with performance conditions is based on the probable outcome of the performance target and is amortized over the vesting period. In some cases, performance targets may be set on an annual basis and communicated to employees after the initial grant date. For these, grant date (for purposes of determining fair value and commencement of amortization) is when the performance targets are set and communicated. The assumptions used to derive the fair value of the performance-based awards are reviewed by management on a quarterly basis. Changes to the fair value of such awards are reflected in Employee compensation and benefits in the Consolidated Statement of Operations. The fair value of the awards with market conditions was determined at the initial grant date and is being amortized over the three-year vesting period. The entire expense will be recognized unless the service condition is not met.

 

 

 

   Weighted-
     Average Grant    
Date Fair

Value(a)
   Number of
      LTIP RSUs      
   Future Grant
 Date  LTIP RSUs 
   LTIP RSU
Dividend
    Equivalents    

LTIP RSUs as of December 31, 2011

     $14.81            1,759,668           178,695           48,879     

Grants

     4.54            107,930               

Grant date fair value set

     6.12            71,304           (71,304       

Forfeitures:

                    

RSUs

     7.07            (15,954        (33,929       

Dividend equivalents

                     (2,787  

Dividend equivalents

                     37,493     
        

 

 

  

 

 

  

 

 

LTIP RSUs as of June 30, 2012

     11.38            1,922,948           73,462           83,585     
        

 

 

  

 

 

  

 

 

LTIP RSUs as of December 31, 2010

                                        

Grants:

                    

LTIP RSUs

     14.81            1,863,772           178,695          

Dividend equivalents

                     16,757     
        

 

 

  

 

 

  

 

 

LTIP RSUs as of June 30, 2011

     14.81              1,863,772             178,695             16,757       

 

(a) Weighted-average grant date fair value for grants is based on the closing price on the grant date. Market-based grants do not use the weighted-average grant date fair value to calculate amortization expense, but a fair value using a Monte Carlo pricing model. The model requires management to develop estimates regarding certain input variables. If we had used different methods to estimate our variables for the Monte Carlo model, or if we had used a different type of pricing model, the fair value of our grants might have been different.

Compensation expense related to the LTIP RSU grants is included in Employee compensation and benefits in the Consolidated Statement of Operations and was $1.0 million for the three months ended June 30, 2012 and $0.9 million for the three months ended June 30, 2011. Compensation expense related to the LTIP RSU grants was $2.0 million for the six months ended June 30, 2012 and $1.9 million for the three months ended June 30, 2011.

 

25  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 9. Income Taxes

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

 

      Three Months Ended June 30,    Six Months Ended June 30,  

(in thousands)

   2012    2011    2012    2011  

Current:

                 

Federal

       $ 1,125               $ 11,638             $ 1,279             $ 22,384         

State and local

     (750        3,495           (487        6,790         
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

     375           15,133           792           29,174         
  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred:

                 

Federal

     (443        (194        3,455           1,478         

State and local

     (219        (70        788           968         
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

     (662        (264        4,243           2,446         
  

 

 

  

 

 

  

 

 

  

 

 

 

Income tax expense

       $ (287              $ 14,869               $ 5,035               $ 31,620         

Tax years 2008 to the present are open for examination by Federal, state and local tax authorities. We are currently under examination by the New York City tax authorities for Investment Adviser for the years 2006 and 2007. There are waivers extending our New York City 2006 and 2007 tax years to December 2012.

A reconciliation between the Federal statutory tax rate of 35% and the effective tax rates is as follows:

 

      Three Months Ended June 30,   Six Months Ended June 30,

(in percentages)

   2012   2011   2012    2011

Federal statutory rate

     35       35       35        35  

State and local, net of Federal benefit, and other

     5          6          5           6     

Non-controlling interests

     4          (1       (2        (1  

Permanent differences:

                 

Vesting of RSUs

                       10               

Realization of unrecognized tax benefit

     (70                (7       

Other

              1          1           1     
  

 

 

 

 

 

 

 

 

  

 

 

Total

     (26 )%          41         42          41    

Our deferred tax asset includes $7.6 million related to amortization of RSU awards granted at prices between $26.25 and $4.42 per share, and vests from September 2012 to February 2015.

Deferred tax benefits on amortization of RSU awards are recorded based on the grant-date fair value of the awards. The actual tax benefit upon vesting is based on our stock price on the date the awards vest. If the stock price on vesting date is less than the grant-date fair value, the excess deferred tax benefit on the awards is charged to Income taxes in the Consolidated Statement of Operations.

As of June 30, 2012, the grant-date fair values of all unvested RSU and RSA grants were in excess of our stock price on that date, in some cases significantly so. If the awards vest at prices below the grant-date fair values, the related deferred tax benefits will be partially unrecoverable, and the amounts could be material.

As of June 30, 2012, $2.0 million of unrecognized tax benefits, if recognized, would have an impact on our effective tax rate.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   26


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ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

A reconciliation of the change in unrecognized tax benefits is as follows:

 

 

(in thousands)

  

 

Balance, January 1, 2011

         $ 2,974     

Additions (reductions) for tax provisions of prior years

         

Additions based on tax provisions related to current year

     203     

Reductions for settlements with taxing authorities

         

Lapse of statute of limitations

         
  

 

 

   

Balance, December 31, 2011

     3,177     

Additions (reductions) for tax provisions of prior years

     29     

Additions based on tax provisions related to current year

         

Reductions for settlements with taxing authorities

     (1,181  

Lapse of statute of limitations

         
  

 

 

   

Balance, June 30, 2012

         $ 2,025       

We believe that it is reasonably possible that there will be a decrease of up to $1.0 million in unrecognized tax benefits within the upcoming year due to the lapse under the statute of limitations.

Note 10. Earnings Per Share (“EPS”)

Basic and diluted EPS were calculated using the following:

 

      Three Months Ended June 30,    Six Months Ended June 30,

(in thousands)

   2012    2011    2012    2011

Net income attributable to Artio Global Investors
– Basic

         $ 1,535               $ 21,150                $ 6,135                $ 43,182      
  

 

 

  

 

 

  

 

 

  

 

 

Net income attributable to non-controlling
interests
(a)

     12                                      

Income tax related to non-controlling interests(a)

     (28                                   
  

 

 

  

 

 

  

 

 

  

 

 

Net income - Diluted

         $ 1,519               $ 21,150                $ 6,135                $ 43,182      
  

 

 

  

 

 

  

 

 

  

 

 

Weighted average shares for basic EPS

     59,213           58,393            58,703            58,373      

Dilutive potential shares from exchange of New
Class A Units by the Principals
(a)

     303                                      

Dilutive potential shares from grants of RSUs(b)

     298           184            289            102      
  

 

 

  

 

 

  

 

 

  

 

 

Weighted average shares for diluted EPS

     59,814             58,577              58,992              58,475        

 

(a) The potential impact of the exchange of non-voting Class A member interests in Holdings (“New Class A Units”) by the Principals, and cancelation of corresponding shares of Class B common stock, for Class A common stock of 0.8 million weighted average shares for the six months ended June 30, 2012, was antidilutive. The potential impact of the exchange of New Class A Units by the Principals, and cancelation of corresponding shares of Class B common stock, for Class A common stock of 1.2 million weighted average shares for the three months and six months ended June 30, 2011, was antidilutive. In April 2012, the Principals each exchanged their remaining 600,000 New Class A Units for 600,000 shares of Class A common stock and a corresponding number of shares of Class B common stock were canceled.
(b) The potential impact of an additional 2.5 million granted RSUs and RSAs for the three months ended June 30, 2012, and an additional 1.9 million granted RSUs and RSAs for the six months ended June 30, 2012, was antidilutive. The potential impact of an additional 2.0 million granted RSUs for the three months ended June 30, 2011, and an additional 1.6 million granted RSUs for the six months ended June 30, 2011, was antidilutive.

On July 27, 2012, our Board of Directors declared a dividend of $0.02 per share to be paid on August 27, 2012, to holders of record of our Class A common stock as of the close of business on August 13, 2012.

 

27  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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ARTIO GLOBAL INVESTORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 11. Commitments and Contingencies

There are no claims against us that are considered probable or reasonably possible of having a material effect on our financial position, results of operations or cash flows.

Although we may not have an explicit legal obligation to do so, we have, at our discretion, reimbursed client accounts for certain operational losses incurred.

Note 12. Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to ASC 820, Fair Value Measurement, which clarifies the FASB’s intent about the application of existing fair value measurement and disclosure requirements. We have included the expanded disclosures requirements, when applicable, in Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated Investment Products, at Fair Value.

Note 13. Subsequent Events

In August 2012, we announced our decision to discontinue offering our U.S. Equity strategies, resulting in reduced staffing levels in U.S. Equity and other parts of the organization. As a result, we expect to record a non-recurring charge in the range of $4.0 to $5.0 million during the third quarter of 2012.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   28


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Introduction

Artio Global Investors Inc. (“Investors” or the “Company”) and subsidiaries (collectively, “we,” “us” or “our”) comprises Investors and its 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 is licensed as a limited-purpose broker-dealer; and certain investment vehicles we consolidate because we have a controlling financial interest in them (the “Consolidated Investment Products”). In April 2012, Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer (“Pell”), and Rudolph-Riad Younes, our Head of International Equity (“Younes,” together with Pell, the “Principals”) exchanged their remaining interests in Holdings for shares of Investors’ Class A common stock, leaving Holdings as a wholly owned subsidiary (see Notes to Consolidated Financial Statements, Note 2. Stockholders’ Equity). Prior to the exchange, Holdings was approximately 98% owned by Investors and 1% owned by each of the Principals. The Principals’ interests were reflected in the consolidated financial statements as Non-controlling interests in Holdings.

Our MD&A is provided in addition to the accompanying consolidated financial statements and footnotes to assist readers in understanding our results of operations and liquidity and capital resources. The MD&A is organized as follows:

 

 

General Overview. Beginning on page 30, we provide a summary of our overall business and the economic environment.

 

 

Key Performance Indicators. Beginning on page 31, we discuss the operating and financial indicators that guide management’s review of our performance.

 

 

Assets Under Management. Beginning on page 34, we provide a detailed discussion of our assets under management (“AuM”), which is the major driver of our operating revenues and key performance indicators.

 

 

Revenues and Other Operating Income. Beginning on page 39, we compare our revenue and other operating income to the corresponding periods a year ago.

 

 

Operating Expenses. Beginning on page 39, we compare our operating expenses to the corresponding periods a year ago.

 

 

Non-operating Income (Loss). Beginning on page 40, we compare our non-operating income (loss) to the corresponding periods a year ago.

 

 

Income Taxes. Beginning on page 40, we compare our effective tax rates to the corresponding periods a year ago.

 

 

Liquidity and Capital Resources. Beginning on page 41, we discuss our working capital as of June 30, 2012, and December 31, 2011, and cash flows for the first six months of 2012 and 2011. Also included is a discussion of the financial capacity available to help fund our future activities.

 

 

New Accounting Standards. Beginning on page 43, we discuss new accounting pronouncements that may apply to us.

 

 

Cautionary Note Regarding Forward-Looking Statements. Beginning on page 43, we describe the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this Form 10-Q relating to our financial results, operations, business plans and prospects. Such forward-looking statements are based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.

 

29  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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General Overview

Business

We are an asset management company that provides investment management services to institutional and mutual fund clients. We manage and advise proprietary (mutual) funds; commingled institutional investment vehicles; institutional separate accounts; sub-advisory accounts; and a hedge fund. While our operations and clients are primarily U.S.-based, a substantial portion of our AuM is invested outside of the U.S. Historically, our distribution activities were primarily focused within North America, and recently, we have expanded our distribution activities into Europe, the Middle East, Australia, New Zealand and parts of Asia. Our revenues are primarily billed in U.S. dollars and are calculated based on the U.S. dollar value of the investment assets we manage for clients. Our managed portfolios have exposures to currencies other than the U.S. dollar, which can affect our revenues. As of June 30, 2012, 48% of our AuM were exposed to currencies other than the U.S. dollar. Consequently, changes in foreign currency exchange rates will affect our revenues. Our expenses are primarily billed and paid in U.S. dollars and not significantly impacted by foreign currency exchange rates, although our shareholder servicing expenses are driven by average daily market value of proprietary fund AuM and therefore, indirectly impacted by foreign currency exchange rates.

For select new product initiatives, we invest in the related investment vehicles in order to provide critical mass. We refer to these investments as “seed money investments.” Income from seed money investments is included in non-operating income. This income is, by nature, variable. Since the third quarter of 2010, we have made aggregate seed money investments of $47 million.

Economic Environment

As an investment manager, we derive substantially all of our operating revenues from providing investment management services to our institutional and mutual fund clients. Such revenues are driven by the amount and composition of our AuM, as well as by our fee structure, making our business results sensitive to the prevailing global economic climate and its impact on investor sentiment and capital markets.

After a strong start for global equities and high yield bonds in the first quarter of 2012, most of the second quarter was spent in negative territory, with the month of May posting the most severe declines. European markets were particularly affected in May, with declines in the euro exacerbating the negative effects for U.S. dollar-based investors. Rising concerns over the debt crisis in Greece and possible contagion effects generally lowered the appetite for risk assets among investors. However, in June, markets exhibited signs of relief amid some progress being made on the Greek bailout, although an ultimate solution is still not in sight. Despite the rally for equities in June, almost all global equity markets ended the second quarter lower, while bonds generally moved higher over the period. For the year-to-date period, the majority of equity and fixed income markets managed to achieve positive results.

Looking ahead, the so-called “fiscal cliff” in the U.S., comprising more than $600 billion in higher taxes and spending reductions in 2013 if Congress is unable to reach a compromise, remains a concern for investors. Worries that such an outcome could trigger a recessionary relapse is likely to dominate market sentiment in the near term, as is the U.S. Presidential election.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   30


Table of Contents

Key Performance Indicators

Our management reviews our performance on a monthly basis, focusing on the indicators described below.

 

 

(in millions, except basis points, percentages and per
share amounts)

   Three Months Ended June 30,    Six Months Ended June 30,
           2012                    2011                    2012                    2011        

 Operating indicators

                   

 AuM at end of period

     $21,156           $46,835           $21,156           $46,835     

 Average AuM for period(a)

     23,616           49,783           26,003           51,206     

 Net client cash flows

     (4,469        (4,528        (10,464        (7,758  

 Market appreciation (depreciation)

     (1,020        35           1,261           1,186     

 Financial indicators

                   

 Investment management fees

     33           78           76           160     

 Effective fee rate (basis points)(b)

     56.7           63.0           58.8           63.0     

 Adjusted operating income(c)

     5           39           16           81     

 Adjusted operating margin(d)

     16.5        50.5        21.1        50.7  

 Adjusted EBITDA(c)

     9           42           22           87     

 Adjusted EBITDA margin(d)

     26.7        54.2        29.2        54.0  

 Adjusted compensation ratio(c)(e)

     50.6        29.6        47.6        30.3  

 Adjusted net income attributable to Artio Global
Investors
(c)

     3           23           10           47     

 Diluted earnings per share

     $    0.03           $    0.36           $    0.10           $    0.74     

 Adjusted diluted earnings per share(f)

     $    0.05           $    0.39           $    0.16           $    0.80     

 

 

(a) Average AuM for a period is computed on the beginning-of-first-month balance and all end-of-month balances within the period.
(b) The effective fee rate is computed by dividing annualized investment management fees (normalized for the number of days in the period) by average AuM for the period.
(c) See the “Adjusted Performance Measures” section of this MD&A for reconciliations of Employee compensation and benefits to Adjusted compensation; Operating income before income tax expense to Adjusted operating income; Net income to adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”); and Net income attributable to Artio Global Investors to Adjusted net income attributable to Artio Global Investors.
(d) Adjusted operating and Adjusted EBITDA margins are calculated by dividing Adjusted operating income and Adjusted EBITDA by Total revenues and other operating income.
(e)

Calculated as Adjusted compensation(c) divided by Total revenues and other operating income.

(f) Adjusted diluted earnings per share is calculated by dividing Adjusted net income attributable to Artio Global Investors by Adjusted weighted average diluted shares (see the “Adjusted Performance Measures” section of this MD&A).

Operating Indicators

Our revenues are driven by the amount and composition of our AuM, as well as by our fee structure. As a result, management closely monitors our AuM. We believe average AuM is more useful than quarter-end AuM in analyzing performance during a period, as most of our fees are calculated based on daily or monthly AuM, rather than quarter-end balances of AuM.

Net client cash flows represent purchases by new or existing clients, less redemptions. Our net client cash flows are driven by the performance of our investment strategies relative to their respective benchmark and/or peers, absolute levels of performance, competitiveness of our fee rates, the success of our marketing and client service efforts, as well as clients’ appetite for risk and the state of equity and fixed income markets overall. Net client cash outflows were $4.5 billion in the three months ended June 30, 2012, and $10.5 billion in the six months ended June 30, 2012. In our view, this reflects a variety of contributing factors, with underperformance in our International Equity strategies during 2009 through 2011 being the primary factor driving net client cash outflows.

Net client outflows for the first half of 2012 were partially offset by market appreciation of $1.3 billion, of which the International Equity strategies represented $0.8 billion.

 

31  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


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Financial Indicators

Management reviews certain financial ratios to monitor progress with internal forecasts, monitor our business drivers and compare our firm with others in the asset management industry. The effective fee rate represents the amount of investment management fees we earn divided by the average dollar value of AuM we manage. This information can be used as an indicator of the contribution of our products to revenues. Adjusted operating and Adjusted EBITDA margins are important indicators of our profitability and the efficiency of our business model. (See the “Adjusted Performance Measures” section of this MD&A for a discussion of financial indicators not prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”).) Other ratios shown in the table on page 31 allow us to review expenses in comparison with our revenues.

Investment management fees are earned from managing clients’ assets and fluctuate based on the total value of AuM, composition of AuM among our investment vehicles and among our investment strategies, and changes in the investment management fee rates on our products. Fees from our International Equity strategies are our primary revenue source and as a percentage of Investment management fees were approximately 70% in the first half of 2012 and 85% in the first half of 2011. The decrease in revenue percentage from our International Equity strategies primarily reflects net client cash outflows in 2011 and the first half of 2012.

Our effective fee rate of 56.7 basis points for the second quarter of 2012 has declined in recent quarters due primarily to a greater proportion of our AuM being in fixed income strategies, which typically have lower average fee rates than our equity strategies.

Our Adjusted operating and Adjusted EBITDA margins in the first half of 2012 decreased compared to the first half of 2011, as revenues declined faster than expenses. We expect our margins to be under pressure throughout 2012, given the significant decline in AuM.

Adjusted Performance Measures

Certain of our financial indicators are adjusted versions of balances in our consolidated financial statements and are not prepared in conformity with GAAP. We believe these adjusted financial indicators are meaningful as they are more representative of our ongoing expense base than their GAAP counterparts. We exclude the amortization expense associated with equity awards granted to employees at the time of our initial public offering (“IPO”) in 2009, severance costs associated with our staff reduction program initiative in 2011 and 2012, and the accelerated amortization of debt expense associated with the termination of our revolving credit facility in the first quarter of 2012. We also present Adjusted net income attributable to Artio Global Investors per diluted share, which assumes the full exchange of our Principals’ non-controlling interests for Class A common stock at the beginning of each period presented. (This adjustment does not conform with GAAP, for those periods in which the shares are antidilutive. In such periods, the adjustment has the effect of increasing earnings per share.) These adjustments are reflected in Adjusted operating income, Adjusted operating margin, Adjusted compensation ratio, Adjusted net income attributable to Artio Global Investors, Adjusted EBITDA, Adjusted EBITDA margin and Adjusted diluted earnings per share. Adjusted EBITDA and Adjusted EBITDA margin also exclude non-operating income. We have adjusted Income taxes to reflect the appropriate effective tax rate for each period after taking into consideration these non-GAAP adjustments.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q   32


Table of Contents

The following table reconciles Employee compensation and benefits to Adjusted compensation, Operating income before income tax expense to Adjusted operating income, Net income to Adjusted EBITDA, and Net income attributable to Artio Global Investors to Adjusted net income attributable to Artio Global Investors.

 

 

     Three Months Ended June 30,    Six Months Ended June 30,

(in thousands)

   2012    2011    2012    2011

 Employee compensation and benefits

       $19,417             $25,812             $41,751             $53,830     

 Less compensation adjustments:

                   

 Staff reduction costs

     652                     865               

 Amortization expense of IPO-related restricted
stock unit grants

     2,224           2,644           4,433           5,268     
  

 

 

  

 

 

  

 

 

  

 

 

 Total compensation adjustments

     2,876           2,644           5,298           5,268     
  

 

 

  

 

 

  

 

 

  

 

 

 Adjusted compensation

     $16,541           $23,168           $36,453           $48,562     
  

 

 

  

 

 

  

 

 

  

 

 

 Operating income before income tax expense

     $  2,506           $36,819           $10,740           $75,941     

 Add: total compensation adjustments

     2,876           2,644           5,298           5,268     

 Add: write-off of unamortized debt issuance
costs

                         122               
  

 

 

  

 

 

  

 

 

  

 

 

 Adjusted operating income

     $  5,382           $39,463           $16,160           $81,209     
  

 

 

  

 

 

  

 

 

  

 

 

 Net income

     $  1,406           $21,794           $6,874           $44,730     

 Less: interest income

     (803        (728        (1,737        (1,295  

 Add: interest expense

     48           501           483           1,027     

 Add: income taxes

     (287        14,869           5,035           31,620     

 Add: depreciation and amortization

     5,586           5,507           10,652           10,677     
  

 

 

  

 

 

  

 

 

  

 

 

 EBITDA

     5,950           41,943           21,307           86,759     

 Add: other non-operating (income) loss(a)

     2,142           383           85           (141  

 Add: staff reduction costs

     652                     865               

 Add: write off of unamortized debt issuance
costs

                         122               
  

 

 

  

 

 

   

 

  

 

 

  

 

 

 Adjusted EBITDA

     $  8,744           $42,326           $22,379           $86,618     
  

 

 

  

 

 

  

 

 

  

 

 

 Net income attributable to Artio Global
Investors

     $  1,535           $21,150           $  6,135           $43,182     

 Add: total compensation adjustments

     2,876           2,644           5,298           5,268     

 Add: write-off of unamortized debt issuance costs

                         122               

 Add: Non-operating income related to
unamortized debt issuance costs

                         71               

 Add: Non-controlling interests in Holdings

     12           719           202           1,488     

 Tax impact of adjustments

     (1,195        (1,240        (2,139        (2,485  
  

 

 

  

 

 

  

 

 

  

 

 

 Adjusted net income attributable to Artio Global
Investors

     $  3,228           $23,273           $  9,689           $47,453     
  

 

 

  

 

 

  

 

 

  

 

 

 Weighted average diluted shares

     59,814           58,577           58,992           58,475     

 Adjusted weighted average diluted shares(b)

     59,814           59,777           59,743           59,675     

 

 

(a) Other non-operating income (loss) represents primarily gains and losses on investments of the Consolidated Investment Products.
(b) Adjusted weighted average diluted shares assumes that the Principals had exchanged all of their non-voting Class A membership interests in Holdings (“New Class A Units”) for Class A common stock. The additional shares are antidilutive in accordance with GAAP.

 

33  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

Assets under Management (“AuM”)

Changes to our AuM, the distribution of our AuM among our investment products and investment strategies, and the effective fee rates on our products, all affect our operating results from one period to another.

The amount and composition of our AuM are influenced by a variety of factors including, among other things:

 

 

investment performance, including our investment decisions and fluctuations in both the financial markets and foreign currency exchange rates;

 

client cash flows into and out of our investment products;

 

the mix of AuM among our various strategies; and

 

our introduction or closure of investment strategies and products.

During the six months ended June, 30, 2012, we managed assets across 10 different strategies, within six asset classes, including:

 

 

International Equity;

 

Global Equity;

 

U.S. Equity;

 

High Grade Fixed Income;

 

High Yield; and

 

Emerging Markets Local Currency Debt.

In the third quarter of 2012, we made the decision to discontinue our U.S. Equity strategies.

Investors invest in our strategies through the investment vehicles set forth in the following table.

The following table sets forth a summary of our AuM by investment vehicle type as of June 30, 2012 and 2011.

 

 

     As of June 30,    As a % of AuM as of June 30,

(in millions, except percentages)

   2012    2011    2012    2011

Proprietary Funds(a)

                     

 A shares

          $  2,789                 $  6,490                

 I shares(b)

     7,298            14,702                
  

 

 

  

 

 

         

 Total

     10,087            21,192            47.7        45.2  

Institutional commingled funds

     3,135            8,285            14.8           17.7     

Separate accounts

     6,465            14,221            30.6           30.4     

Sub-advisory accounts

     1,469            3,137            6.9           6.7     
  

 

 

  

 

 

  

 

 

  

 

 

Ending AuM

     $21,156              $46,835              100.0          100.0    

 

(a) Proprietary Funds include both SEC-registered funds and private offshore funds. SEC-registered mutual funds within our proprietary funds are: Artio International Equity Fund; Artio International Equity Fund II; Artio Total Return Bond Fund; Artio Global High Income Fund; Artio Global Equity Fund Inc.; Artio U.S. Microcap Fund; Artio U.S. Midcap Fund; Artio U.S. Multicap Fund; Artio U.S. Smallcap Fund; and Artio Emerging Markets Local Currency Debt Fund.
(b) Amounts invested in private offshore funds and in the hedge fund are categorized as “I” shares.

The different fee structures associated with each type of investment vehicle make the composition of our AuM an important determinant of the investment management fees we earn. We typically earn higher effective investment management fee rates from our proprietary funds and institutional commingled funds as compared to our separate and sub-advised accounts.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q  34


Table of Contents

The following table sets forth the changes in AuM by investment vehicle type.

 

      Three Months Ended June 30,    Six Months Ended June 30,

 (in millions, except percentages)

   2012    2011    % Change    2012    2011    % Change

 Proprietary Funds:

                             

 Beginning AuM

       $ 12,862             $ 22,854           (44 )%             $13,366               $23,013           (42 )%   

 Gross client cash inflows

     784           1,136           (31        2,019           2,924           (31  

 Gross client cash outflows

     (3,043        (2,739        (11        (5,755        (5,212        (10  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Net client cash flows

     (2,259        (1,603        (41        (3,736        (2,288        (63  

 Transfers between investment vehicles

                                   52                     *     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total client cash flows

     (2,259        (1,603        (41        (3,684        (2,288        (61  

 Market appreciation (depreciation)

     (516        (59        *           405           467           (13  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Ending AuM

     10,087           21,192           (52        10,087           21,192           (52  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Institutional Commingled Funds:

                             

 Beginning AuM

     4,346           9,374           (54        4,912           9,236           (47  

 Gross client cash inflows

     92           104           (12        124           257           (52  

 Gross client cash outflows

     (1,091        (1,149        5           (2,198        (1,573        (40  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Net client cash flows

     (999        (1,045        4           (2,074        (1,316        (58  

 Transfers between investment vehicles

               (22        *           13           188           (93  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total client cash flows

     (999        (1,067        6           (2,061        (1,128        (83  

 Market appreciation (depreciation)

     (212        (22        *           284           177           60     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Ending AuM

     3,135           8,285           (62        3,135           8,285           (62  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Separate Accounts:

                             

 Beginning AuM

     7,858           14,768           (47        9,799           16,801           (42  

 Gross client cash inflows

     53           31           71           154           166           (7  

 Gross client cash outflows

     (1,232        (677        (82        (3,926        (2,917        (35  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Net client cash flows

     (1,179        (646        (83        (3,772        (2,751        (37  

 Transfers between investment vehicles

               22           *           (65        (188        65     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total client cash flows

     (1,179        (624        (89        (3,837        (2,939        (31  

 Market appreciation (depreciation)

     (214        77           *           503           359           40     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Ending AuM

     6,465           14,221           (55        6,465           14,221           (55  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Sub-advisory Accounts:

                             

 Beginning AuM

     1,579           4,332           (64        2,282           4,357           (48  

 Gross client cash inflows

     26           66           (61        65           217           (70  

 Gross client cash outflows

     (58        (1,300        96           (947        (1,620        42     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Net client cash flows

     (32        (1,234        97           (882        (1,403        37     

 Transfers between investment vehicles

                                                           
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total client cash flows

     (32        (1,234        97           (882        (1,403        37     

 Market appreciation (depreciation)

     (78        39           *           69           183           (62  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Ending AuM

     1,469           3,137           (53        1,469           3,137           (53  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total AuM:

                             

 Beginning AuM

     26,645           51,328           (48        30,359           53,407           (43  

 Gross client cash inflows

     955           1,337           (29        2,362           3,564           (34  

 Gross client cash outflows

     (5,424        (5,865        8           (12,826        (11,322        (13  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Net client cash flows

     (4,469        (4,528        1           (10,464        (7,758        (35  

 Transfers between investment vehicles

                                                           
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total client cash flows

     (4,469        (4,528        1           (10,464        (7,758        (35  

 Market appreciation (depreciation)

     (1,020        35           *           1,261           1,186           6     
  

 

 

  

 

 

       

 

 

  

 

 

    

 Ending AuM

       $ 21,156               $ 46,835             (55              $21,156                 $46,835             (55    

* Calculation not meaningful.

 

35  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

Market appreciation for the three months and six months ended June 30, 2012, compared to the corresponding periods in 2011, was primarily attributable to the following strategies:

 

      Three Months Ended June 30,    Six Months Ended June 30,

 (in millions, except percentages)

   2012    2011    % Change    2012    2011    % Change

 Market appreciation (depreciation):

                               

 International Equity I

       $ (464          $ (69        *          $ 303              $ 278            9  

 International Equity II

     (536        (28        *           502            423            19     

 Other strategies

     (20        132           (115        456            485            (6  
  

 

 

  

 

 

       

 

 

  

 

 

    

 Total market appreciation
(depreciation)

       $ (1,020            $ 35             *               $ 1,261                $ 1,186              6       

* Calculation not meaningful.

The MSCI AC World ex USA Index (the “Index”) decreased 7.6% during the three months ended June 30, 2012, and increased by 0.4% during the three months ended June 30, 2011. In the three months ended June 30, 2012, the gross performance of our International Equity I strategy was slightly ahead of the Index and our International Equity II strategy outperformed the Index by 0.5%. In the three months ended June 30, 2011, the gross performance of our International Equity I strategy trailed the Index by 0.7% and our International Equity II strategy trailed the Index by 0.6%.

The Index increased 2.8% during the six months ended June 30, 2012, and by 3.8% during the six months ended June 30, 2011. In the six months ended June 30, 2012, the gross performance of our International Equity I strategy outperformed the Index by 0.7%, and our International Equity II strategy outperformed the Index by 0.9%. In the six months ended June 30, 2011, the gross performance of our International Equity I and our International Equity II strategies each trailed the Index by 1.9%.

Absolute returns for the six months ended June 30, 2012, for our International Equity strategies and the Index were positive, although there was considerable volatility in these returns over this period. In response to a constant flow of information related to the European debt crisis, market direction was shaped by the degree of progress being made in addressing the Greek situation and possible contagion to other countries.

Relative returns versus the Index for the first half of 2012 were positive due to stock selection within developed market sectors. In developed markets outside of Japan, returns benefited from stock selection in the healthcare, industrials, energy consumer staples and telecommunications sectors, while stock selection within materials detracted. Within Japan, stock selection was positive, notably within the consumer discretionary sector which offset the negative effect of the underweight to financials. Elsewhere, emerging market stock selection had a negative effect overall, driven largely by several positions within China which were impacted by fears over an economic slowdown. The underweight to Brazil, proved positive given the weakness within this market for the first half of 2012.

Net client cash flows across all investment vehicles increased slightly during the three months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.4 billion increase in our High Grade Fixed Income strategies’ net client cash flows, as the three months ended June 30, 2012, had net client cash inflows compared to net client cash outflows in the corresponding period in 2011;

 

a $0.3 billion decrease in our International Equity I strategy’s net client cash outflows; and

 

a $0.1 billion decrease in our International Equity II strategy’s net client cash outflows,

partially offset by,

 

 

a $0.5 billion decrease in our High Yield strategy’s net client cash flows, as the three months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011; and

 

a $0.1 billion increase in our Global Equity strategy’s net client cash outflows.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q  36


Table of Contents

Net client cash flows across all investment vehicles decreased $2.7 billion during the six months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $1.9 billion increase in our International Equity II strategy’s net client cash outflows;

 

a $0.9 billion increase in our International Equity I strategy’s net client cash outflows;

 

a $0.3 billion increase in our Global Equity strategy’s net client cash outflows; and

 

a $0.2 billion decrease in our High Yield strategy’s net client cash flows, as the six months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011,

partially offset by:

 

 

a $0.6 billion increase in our High Grade Fixed Income strategies’ net client cash flows, as the six months ended June 30, 2012, had net client cash inflows compared to net client cash outflows in the corresponding period in 2011.

Proprietary Funds

Net client cash flows related to proprietary funds decreased $0.7 billion during the three months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.6 billion decrease in our Global High Income Fund’s net client cash flows, as the three months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011; and

 

a $0.1 billion increase in our International Equity II Fund’s net client cash outflows.

Net client cash flows related to proprietary funds decreased $1.4 billion during the six months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.9 billion increase in our International Equity II Fund’s net client cash outflows;

 

a $0.3 billion increase in our International Equity I Fund’s net client cash outflows ; and

 

a $0.3 billion decrease in our Global High Income Fund’s net client cash flows, as the six months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011,

partially offset by:

 

 

a $0.2 billion increase in our Total Return Bond Fund’s net client cash flows, as the six months ended June 30, 2012, had net client cash inflows compared to net client cash outflows in the corresponding period in 2011.

Institutional Commingled Funds

Net client cash flows related to institutional commingled funds increased slightly during the three months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.1 billion increase in our High Grade Fixed Income strategy’s net client cash inflows.

Net client cash flows related to institutional commingled funds decreased $0.8 billion during the six months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.7 billion increase in our International Equity II strategy’s net client cash outflows; and

 

a $0.1 billion decrease in our Global Equity strategy’s net client cash flows, as the six months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011.

 

37  Artio Global Investors Inc. Second Quarter 2012 Form 10-Q


Table of Contents

Separate Accounts

Net client cash flows related to separate accounts decreased $0.5 billion during the three months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.5 billion increase in our International Equity II strategy’s net client cash outflows;

 

a $0.1 billion decrease in our High Grade Fixed Income strategy’s net client cash flows, as the three months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011; and

 

a $0.1 billion increase in our Global Equity strategy’s net client cash outflows,

partially offset by,

 

 

a $0.2 billion decrease in our International Equity I strategy’s net client cash outflows.

Net client cash flows related to separate accounts decreased $1.0 billion during the six months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.5 billion increase in our International Equity I strategy’s net client cash outflows;

 

a $0.3 billion increase in our International Equity II strategy’s net client cash outflows;

 

a $0.1 billion increase in our Global Equity strategy’s net client cash outflows; and

 

a $0.1 billion decrease in our High Grade Fixed Income strategy’s net client cash flows, as the six months ended June 30, 2012, had net client cash outflows compared to net client cash inflows in the corresponding period in 2011,

partially offset by:

 

 

a $0.1 billion decrease in our High Yield strategy’s net client cash outflows.

Sub-advisory Accounts

Net client cash flows related to sub-advised accounts increased $1.2 billion during the three months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.7 billion decrease in our International Equity II strategy’s net client cash outflows;

 

a $0.5 billion decrease in our High Grade Fixed Income strategy’s net client cash flows, as the three months ended June 30, 2012, had net client cash inflows compared to net client cash outflows in the corresponding period in 2011; and

 

a $0.1 billion decrease in our High Yield strategy’s net client cash outflows.

Net client cash flows related to sub-advised accounts increased $0.5 billion during the six months ended June 30, 2012, compared to the corresponding period in 2011, mainly as a result of:

 

 

a $0.5 billion increase in our High Grade Fixed Income strategy’s net client cash flows, as the six months ended June 30, 2012, had net client cash inflows compared to net client cash outflows in the corresponding period in 2011.

 

Artio Global Investors Inc. Second Quarter 2012 Form 10-Q  38


Table of Contents

Revenues and Other Operating Income

Our revenues are driven by investment management fees earned from managing clients’ assets. Investment management fees fluctuate based on the total value of AuM, composition of AuM among our investment vehicles and among our investment strategies, and changes in the investment management fee rates on our products.

The following table sets forth average AuM, the effective fee rate and Total revenues and other operating income for the three months and six months ended June 30, 2012 and 2011.

 

      Three Months Ended June 30,    Six Months Ended June 30,

(in thousands, except for Average AuM,

effective fee rate and percentages)

           2012                    2011                % Change                2012                    2011                % Change    

Average AuM (in millions)

     $23,616           $49,783           (53 )%         $26,003           $  51,206           (49 )%   
  

 

 

  

 

 

       

 

 

  

 

 

    

Effective fee rate (basis points)

     56.7           63.0           (6.3 )bp         58.8           63.0           (4.2 )bp   
  

 

 

  

 

 

       

 

 

  

 

 

    

Investment management fees

     $33,320           $78,209           (57 )%         $76,091           $159,985           (52 )%   

Net gains (losses) on funds held for
deferred compensation

     (546        (56        *           614           363           69     

Foreign currency losses

     (60        (2        *           (61        (20        *     
  

 

 

  

 

 

       

 

 

  

 

 

    

Total revenues and other operating income

     $32,714             $78,151             (58          $76,644             $160,328             (52    

 

* Calculation not meaningful.

Total revenues and other operating income decreased by $45.4 million for the three months ended June 30, 2012, compared to the corresponding period in 2011, due primarily to a 53% decline in average AuM and a lower effective fee rate.

Total revenues and other operating income decreased by $83.7 million for the six months ended June 30, 2012, compared to the corresponding period in 2011, due primarily to a 49% decline in average AuM and a lower effective fee rate.

Operating Expenses

 

      Three Months Ended June 30,    Six Months Ended June 30,

(in thousands, except percentages)

           2012                    2011                % Change                2012                    2011              % Change  

Employee compensation and benefits

     $19,417            $25,812            (25 )%         $41,751            $53,830            (22 )%   

Shareholder servicing and marketing

     3,043            5,163            (41        6,667            10,028            (34  

General and administrative

     7,748            10,357            (25        17,486            20,529            (15  
  

 

 

  

 

 

       

 

 

  

 

 

    

Total operating expenses

     $30,208              $41,332              (27          $65,904              $84,387              (22    

Operating expenses decreased by $11.1 million for the three months ended June 30, 2012, and decreased by $18.5 million for the six months ended June 30, 2012, compared to the corresponding periods in 2011, due to lower employee compensation, shareholder servicing and marketing, and general and administrative costs.

In August 2012, we announced our decision to discontinue offering our U.S. Equity strategies, resulting in reduced staffing levels in U.S. Equity and other parts of the organization. As a result, we expect to record a non-recurring charge in the range of $4.0 to $5.0 million during the third quarter of 2012.

This reduction in staffing levels, in conjunction with other cost reduction initiatives embarked on during the first half of 2012, are expected to result in pro forma annual savings, as compared to the beginning of 2012, of approximately $20.0 million. The pro forma annual savings will be primarily in the form of lower compensation.

Employee Compensation and Benefits

Employee compensation and benefits decreased $6.4 million for the three months ended June 30, 2012, and $12.1 million for the six months ended June 30, 2012, compared to the corresponding periods in 2011, due primarily to a decrease in current year incentive compensation awards and lower sales incentives and salaries, partially offset by higher amortization of deferred incentive compensation awards and higher severance expenses.

 

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Approximately 24% of Employee compensation and benefits for the three months ended June 30, 2012, 18% for the three months ended June 30, 2011, 22% for the six months ended June 30, 2012, and 17% for the six months ended June 30, 2011, represents share-based compensation, which does not require an outlay of cash.

Shareholder Servicing and Marketing

Shareholder servicing and marketing expenses decreased $2.1 million for the three months ended June 30, 2012, and by $3.4 million for the six months ended June 30, 2012, compared to the corresponding periods in 2011, due primarily to a decline in platform charges associated with lower average AuM, lower custody fees and lower marketing expenses. Shareholder servicing expenses are driven by the average daily market value of proprietary fund AuM.

General and Administrative

General and administrative expenses decreased $2.6 million for the three months ended June 30, 2012, and decreased $3.0 million for the six months ended June 30, 2012, compared to the corresponding periods in 2011, due primarily to lower expenses across most categories.

Non-operating Income (Loss)

Non-operating income (loss) primarily results from income related to seed money investments, including the results from the Consolidated Investment Products, and interest expense incurred on borrowings under our term credit facility. The following table sets forth Non-operating income (loss).

 

      Three Months Ended June 30,    Six Months Ended June 30,

(in thousands, except percentages)

           2012                    2011              % Change              2012                    2011              % Change  

The Consolidated Investment Products
and other seed money investments:

                             

Interest income

     $    803           $ 728           10        $1,737           $1,295           34  

Net gains (losses)

     (2,130        (290        *           (49        242           (120  

Expenses

     (74        (70        (6        (87        (79        (10  
  

 

 

  

 

 

       

 

 

  

 

 

    

Total(a)

     (1,401        368           *           1,601           1,458           10     

Interest expense

     (48        (501        90           (483        (1,027        53     

Other income (loss)

     62           (23        *           51           (22        *     
  

 

 

  

 

 

       

 

 

  

 

 

    

Total non-operating income (loss)

     $(1,387          $(156          *             $1,169             $   409             186       

 

* Calculation not meaningful.
(a) Includes aggregate non-operating loss of $0.1 million for the three months ended June 30, 2012, and $0.1 million for the three months ended June 30, 2011,and non-operating income of $0.5 million for the six months ended June 30, 2012, and $0.1 million for the six months ended June 30, 2011, related to non-controlling interests in the Consolidated Investment Products.

Non-operating loss increased $1.2 million in the three months ended June 30, 2012, compared to the corresponding period in 2011, due to an increase in losses in 2012 by the Consolidated Investment Products and other seed money investments, partially offset by no interest expense from our term credit facility in 2012.

Non-operating income increased $0.8 million in the six months ended June 30, 2012, compared to the corresponding period in 2011, due to lower interest expense resulting from principal payments on our debt and higher income from the Consolidated Investment Products.

Income Taxes

Investors is organized as a Delaware corporation, and therefore is subject to U.S. Federal, state and local income taxes. As a member of Holdings, Investors incurs U.S. Federal, state and local income taxes on its allocable share of income of Holdings, including Holdings’ subsidiaries.

 

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Our effective tax rates were (26)% for the three months ended June 30, 2012, and 42% for the six months ended June 30, 2012. Our effective tax rates were 41% for the three months and six months ended June 30, 2011. During the second quarter of 2012, we reversed a tax liability reserve upon the settlement of an uncertain tax position. The impact decreased our effective tax rate by 70% for the three months ended June 30, 2012, and by 7% for the six months ended June 30, 2012. A write-off of the deferred tax asset associated with the vesting of restricted stock units at a price lower than their grant-date price increased our effective tax rate by 10% for the six months ended June 30, 2012. (See the “Deferred Taxes” section of this MD&A.)

Liquidity and Capital Resources

Working Capital

Below is a table showing our working capital, excluding the Consolidated Investment Products.

 

      As of June 30,    As of December 31,             

(in thousands, except percentages)

   2012    2011      % Change  

Cash

     $  59,899           $108,518           (45 )%   

Investments, fair value – Artio Global funds held for
deferred compensation

     10,142           10,211           (1  

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

     20,982           32,219           (35  

Income tax receivable

     15,820           12,756           24     
  

 

 

  

 

 

    
     106,843           163,704           (35  

Less:

              

Term loan due within one year

     —             (37,500        100     

Accrued compensation and benefits

     (14,406        (35,530        59     

Accounts payable and accrued expenses

     (4,397        (5,958        26     

Accrued income taxes payable

     (3,107        (4,114        24     
  

 

 

  

 

 

    

Working capital

     $  84,933             $  80,602             5       

In the first half of 2012, we prepaid $37.5 million in borrowings under our term credit facility, and paid $7.0 million to our Principals under the tax receivable agreement, $4.7 million in dividends, and the 2011 cash bonuses, which were accrued during 2011.

Our liquidity is a function of both our working capital, reflected above, and our ability to generate positive operating cash flows. Our operating cash flows have come under pressure from declining AuM and revenues. During the first half of 2012, we had operating cash outflows of $11.6 million, driven by declining income, partially offset by lower seed money investments in 2012 compared to 2011.

We continue to believe that the combination of our working capital and operating cash flows is sufficient to meet our obligations. For the six months ended June 30, 2012, approximately 22% of our compensation costs relate to stock-based compensation, which does not require any outlay of cash. A portion of our employee compensation and a significant portion of our shareholder servicing expenses vary with our revenues.

On July 27, 2012, our Board of Directors declared a dividend of $0.02 per share to be paid on August 27, 2012, to holders of record of our Class A common stock as of the close of business on August 13, 2012.

In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our common stock, which expires on December 31, 2013. As of June 30, 2012, we may purchase up to an aggregate of 2,226,061 shares of our Class A common stock through December 31, 2013.

 

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Debt

On March 29, 2012, Holdings prepaid the outstanding balance of $37.5 million borrowed under a $60.0 million term credit facility, and terminated both the term credit facility and a $100.0 million revolving credit facility. Both the term credit facility and the revolving credit facility would have matured in October 2012.

Our average outstanding borrowings under the term credit facility were $18.3 million in the six months ended June 30, 2012. We did not borrow under the revolving credit facility.

Certain Consolidated Investment Products employ leverage to finance their investments. The leverage takes the form of a prime brokerage arrangement or is provided by a total return swap on selected assets. Interest on the prime brokerage arrangement is payable at the Fed Funds rate plus a range of 40 to 125 basis points; and 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 June 30, 2012, interest was computed on the greater of the actual reference portfolio book value of $37.0 million or the then applicable minimum portfolio book value of $50.0 million under the total return swap agreement. The minimum portfolio book value increases to $75 million in the fourth quarter of 2012. The designated maturity of the total return swap is monthly and has a scheduled ramp-down after 18 months. Both borrowing arrangements are currently collateralized by investments held at the lending bank. In the case of the total return swap, the counterparty to the swap is not obligated to offset portfolio risk by retaining or purchasing the underlying loans. Accordingly, our pricing procedures consider the effect of counterparty risk when assigning fair values to our investments.

Cash Flows

The following table sets forth our cash flows for the first six months of 2012 and 2011.

 

      Six Months Ended June 30,

(in thousands, except percentages)

           2012                    2011                % Change    

Cash flow data:

              

Net cash used in operating activities

     $  (11,597        $  (1,596        *  

Net cash provided by (used in) investing activities

     428           (3,517        112     

Net cash used in financing activities

     (36,853        (6,102        *     

Effect of exchange rate changes on cash

     (61        (20        *     
  

 

 

  

 

 

    

Net decrease in cash

         $  (48,083              $(11,235          *       

* Calculation not meaningful.

Net cash used in operating activities increased $10.0 million for the six months ended June 30, 2012, compared to the corresponding period in 2011, primarily reflecting lower net income, partially offset by a decrease in seed money investments.

Net cash provided by investing activities was $0.4 million for the six months ended June 30, 2012, compared to Net cash used in investing activities of $3.5 million for the corresponding period in 2011, primarily reflecting a decrease in investments held for deferred compensation.

Net cash used by financing activities increased $30.8 million for the six months ended June 30, 2012, compared to the corresponding period in 2011, primarily reflecting a $37.5 million prepayment of the borrowing under the term credit facility in 2012 compared to $9.0 million paid in 2011 and lower contributions received from non-controlling interests in the Consolidated Investment Products, partially offset by borrowings under the total return swap by the Consolidated Investment Products and a decrease in dividends paid.

Deferred Taxes

The majority of our deferred tax asset (“DTA”) of $193 million as of June 30, 2012, is a result of the step-up in tax basis relating to the exchanges by the Principals in 2009, 2010 and 2012 of New Class A Units for Investors’ Class A common stock. The amortization of the step-up for tax purposes occurs annually for approximately 15 years from the current year, in amounts ranging from approximately $23 million to $52 million a year.

Recovery of the DTA depends on our ability to generate sufficient taxable income to utilize the deductible amortization. Amounts not used in the year generated may be available through carryback or carryforward to other

 

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taxable years. We regularly evaluate the recoverability of this DTA to assess the need for a valuation allowance. The evaluation considers primarily historical taxable income, but also the likelihood of future taxable income based on our current financial results and other operating conditions, such as our AuM. We believe that it is ‘more likely than not’ that we will generate sufficient future taxable income to recover this DTA.

As our financial results, and related AuM, have declined in recent quarters, the margin by which we conclude that recoverability is ‘more likely than not’ has declined. A continued decline in our operating results, or an extended period during which our results fail to recover, could change our evaluation of the recoverability of this DTA, and we might be required to record a valuation allowance to reflect doubtful recoverability. 85% of any valuation allowance would be charged to Due under tax receivable agreement in the Consolidated Statement of Financial Position, and 15% would be charged to Income taxes in the Consolidated Statement of Operations.

We have a DTA of $7.6 million that results from stock-based compensation expenses that are deductible for tax purposes only when they vest. Stock-based compensation, and the related deferred tax benefit, is recorded based on the grant-date fair value of the awards. The actual tax deduction is based on the price of our stock on the date the awards vest. If the stock price on the vesting date is less than grant-date fair value, the excess DTA is charged to Income taxes in the Consolidated Statement of Operations.

As of June 30, 2012, the grant-date fair values of all unvested restricted stock unit and restricted stock award grants were in excess of our stock price on that date, in some cases, significantly so. If the awards vest at prices below their grant-date fair values, the related deferred tax benefits will be partially unrecoverable, and the amounts could be significant.

The carrying amount of the DTA relating to stock-based compensation awards that vest within the next quarter is $3.7 million. If the closing price of our stock on the date the awards vest (September 2012) was the same as the closing price of our stock on June 30, 2012, $3.50, we would be able to recognize only $0.5 million of the DTA.

Contractual Obligations

On March 29, 2012, we terminated our $60.0 million term credit facility and our $100.0 million revolving credit facility, both of which would have matured in October 2012.

Off-Balance Sheet Arrangements

The Consolidated Investment Products held credit default swaps, a total return swap, foreign exchange contracts and options as of June 30, 2012. As of June 30, 2012, the aggregate notional/nominal amount of off-balance sheet arrangements outstanding was $86.4 million. (See Notes to the Consolidated Financial Statements, Note 6. Derivative Contracts.)

New Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to ASC 820, Fair Value Measurement, which clarifies the FASB’s intent about the application of existing fair value measurement and disclosure requirements. We have included the expanded disclosures requirements, when applicable, in the Notes to Consolidated Financial Statements, Note 5. Investments, at Fair Value and Investments Sold, Not Yet Purchased by the Consolidated Investment Products, at Fair Value.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Report on Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, our anticipated growth strategies,

 

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descriptions of new business initiatives, investor behavior, our free cash flow and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Report on Form 10-Q to conform our prior statements to actual results or revised expectations.

Our 2011 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 29, 2012 (“Form 10-K”), pursuant to the provisions of the Securities Act of 1934, listed various important factors that could cause actual results to differ materially from projected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You can find them in our Form 10-K under the heading “Risk Factors.” We incorporate that section of the Form 10-K in this filing and readers of this Quarterly Report on Form 10-Q should refer to it. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Revenues and Other Operating Income

Our revenues are exposed to market risk through the value of the funds and accounts we manage. Substantially all of our revenue is derived from investment advisory agreements with these funds and accounts. Under these agreements, the fees we receive are based on the fair value of the assets under management (“AuM”) and our fee rates. Accordingly, our revenue and income may decline as a result of:

 

 

the value of AuM decreasing, as a result of a decline in performance;

 

our clients withdrawing funds; or

 

a shift in product mix to lower margin products.

Our AuM was $21.2 billion as of June 30, 2012. Assuming a 10% increase or decrease in the value of the AuM and the change being proportionally distributed over all our products, the fair value would increase or decrease by $2.1 billion, which would cause an annualized increase or decrease in Total revenues and other operating income of approximately $12.7 million at our current effective fee rate.

We have not adopted a corporate-level risk management policy regarding the hedging of client assets, nor have we historically attempted to hedge revenue risks that would arise from fluctuations in the fair value of these assets.

Investments

We are subject to market risk from a decline in the price of investments that we own to fund future deferred compensation liabilities, as well as from changes in the price of investments held by our seed money investments. As of June 30, 2012, the securities we own to fund future deferred compensation liabilities consisted of Artio Global Funds. Management regularly monitors the value of these investments; however, we have not adopted a specific risk management policy to manage the associated market risk. Gains or losses on investments that we own to manage future deferred compensation liabilities match the related adjustments to compensation expense over the entire service period of the deferred compensation, but will not match in any single fiscal period.

As of June 30, 2012, the securities owned by the Consolidated Investment Products and other seed money investments, net of investments sold, not yet purchased, consisted primarily of equity securities, corporate bonds and term loans. The fair value of these investments was $60.0 million as of June 30, 2012. Assuming a 10% increase or

 

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decrease in the values of these investments, the fair value would increase or decrease by $6.0 million as of June 30, 2012, of which a pro rata portion would be allocable to non-controlling interests.

As of June 30, 2012, $2.2 million of our seed money investments, representing less than 1% of our total assets, were invested in financial instruments domiciled in the euro zone.

Exchange Rate Risk

A substantial portion of the funds and accounts that we advise, or sub-advise, hold investments that are exposed to currencies other than the U.S. dollar. These client portfolios may hold currency forwards or other derivative instruments. The fair value of these investments and instruments are affected by movements in the rate of exchange between the U.S. dollar and the underlying foreign currency. Such movements in exchange rates affect the fair value of assets held in accounts we manage, thereby affecting the amount of revenue we earn. The fair value of the assets we manage was $21.2 billion as of June 30, 2012. In general, the U.S. dollar fair value of AuM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar, however, this is not invariant. Further, although our Revenues, which are billed in U.S. dollars, will generally change as our AuM changes, the relationship may not be exact. Our exposure to foreign currencies may change significantly on a daily basis, therefore, our average daily foreign currency exposure may be significantly different than at period end. A 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of the AuM by $1.0 billion, which would cause an annualized increase or decrease in Total revenues and other operating income of $5.9 million. As of June 30, 2012, approximately 48% of our AuM had exposure to currencies other than the U.S. dollar.

The composition of the exposure within our AuM approximates:

 

 

 

   As of
June 30,  2012

Euro

        11  

British pound

        9     

Japanese yen

        7     

Swiss franc

        4     

Hong Kong dollar

        4     

Other (representing approximately 40 currencies)

        13     
  

 

            48    

The net assets of the Consolidated Investment Products held as of June 30, 2012, were primarily denominated in U.S. dollars. The investments held pursuant to the deferred compensation plan include Artio Global Funds, whose underlying assets are primarily non-dollar denominated. The effect of a 10% change in exchange rates on such securities would not have a material effect on the financial statements.

The composition of the non-U.S. dollar exposure from the Consolidated Investment Products approximates:

 

 

 

   As of
June 30,  2012

Turkish lira

        5  

Mexican peso

        5     

South African rand

        5     

Thai baht

        4     

Brazilian real

        4     

Euro

        (3  

Other (representing 10 currencies)

        15     
  

 

            35    

 

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Interest Rate Risk

The Consolidated Investment Products and certain of the accounts we advise or sub-advise own fixed income securities. Assuming a 100 basis point increase or decrease in interest rates, we estimate that the value of the fixed income securities we manage or sub-advise would change by approximately $182.7 million. The impact of such changes would not be material to our revenues or net income.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to information required to be disclosed in our periodic reports filed with the SEC.

During our most recent fiscal quarter, no changes have occurred in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Our 2011 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 29, 2012 (“Form 10-K”), contains a section entitled “Risk Factors.” We incorporate that section of the Form 10-K in this filing and readers should refer to it.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Investors’ share repurchase activity for each of the three months in the period ended June 30, 2012, was as follows:

 

Period

        Total Number of      
Shares
Repurchased(a)
     Average Price Paid
Per Share
     Total Number of
Shares Purchased
   as  Part of Publicly   
Announced Plans

or Programs(a)
     Approximate
Shares that May
Yet be Purchased
   Under the Plans or  
Programs(a)
 

April 1, 2012 through April 30, 2012

     —             $ —                 —             2,226,061       

May 1, 2012 through May 31, 2012

     —             —                 —             2,226,061       

June 1, 2012 through June 30, 2012

     —             —                 —             2,226,061       
  

 

 

       

 

 

    

For the quarter ended June 30, 2012

     —             —                 —             2,226,061       

 

(a) In December 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of our Class A common stock, which expires on December 31, 2013.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

 

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Item 5. Other Information.

None.

Item 6. Exhibits.

 

1) Exhibit 31.1

   Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

2) Exhibit 31.2

   Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

3) Exhibit 32.1

   Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

4) Exhibit 32.2

   Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

5) Exhibit 101:

  

    EX-101.INS

   XBRL Instance Document

    EX-101.SCH

   XBRL Taxonomy Extension Schema

    EX-101.CAL

   XBRL Taxonomy Calculation Linkbase

    EX-101.LAB

   XBRL Taxonomy Label Linkbase

    EX-101.PRE

   XBRL Taxonomy Presentation Linkbase

    EX-101.DEF

   XBRL Taxonomy Definition Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on August 8, 2012.

 

Artio Global Investors Inc.
By:      

/s/ Francis Harte

  Name:       Francis Harte
  Title:  

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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