1.	ORGANIZATION AND BUSINESS

Silvercrest Asset Management Group Inc. (“Silvercrest”), together with its consolidated subsidiaries (collectively the “Company”), was formed as a Delaware corporation on July 11, 2011. Silvercrest was formed for the purpose of completing a public offering and related transactions in order to carry on the business of Silvercrest L.P. and its subsidiaries.

Silvercrest L.P., together with its consolidated subsidiaries (collectively “SLP”), provides investment management and family office services to individuals and families and their trusts, and to endowments, foundations and other institutional investors primarily located in the United States of America. The business includes the management of funds of funds, and other investment funds, collectively referred to as the “Silvercrest Funds”.

SLP was formed on December 10, 2008 and commenced operations on January 1, 2009.

On March 11, 2004, SLP acquired 100% of the outstanding shares of James C. Edwards Asset Management, Inc. (“JCE”) and subsequently changed JCE’s name to Silvercrest Financial Services, Inc. (“SFS”). On December 31, 2004, SLP acquired 100% of the outstanding shares of The LongChamp Group, Inc. (now SAM Alternative Solutions, Inc.) (“LGI”). Effective March 31, 2005, SLP entered into an Asset Contribution Agreement with, and acquired all of the assets, properties, rights and certain liabilities of Heritage Financial Management, LLC (“HFM”). Effective October 3, 2008, SLP acquired 100% of the outstanding limited liability company interests of Marathon Capital Group, LLC (“MCG”) through a limited liability company interest purchase agreement dated September 22, 2008. On November 1, 2011, SLP acquired certain assets of Milbank Winthrop & Co. (“Milbank”). On April 1, 2012, SLP acquired the LLC interests of MW Commodity Advisors, LLC (“Commodity Advisors”). On March 28, 2013, SLP acquired certain assets of Ten-Sixty Asset Management, LLC (“Ten-Sixty”). See Notes 3, 7 and 8 for additional information related to goodwill and intangible assets from these acquisitions.

Reorganization and Initial Public Offering

Pursuant to a reorganization agreement effective on June 26, 2013, Silvercrest became the sole general partner in SLP and its only material asset was the general partner interest in SLP, represented by 4,790,694 Class A units or approximately 43% of the economic interests of SLP. Effective June 26, 2013, Silvercrest controls all of the businesses and affairs of SLP and, through SLP and its subsidiaries, continues to conduct the business previously conducted by these entities prior to the reorganization.

On July 2, 2013, Silvercrest completed the initial public offering of 4,790,684 of its Class A common shares at $11.00 per share (the “IPO”). Silvercrest’s stock began trading on June 27, 2013 on NASDAQ under the symbol “SAMG”. The net proceeds from the IPO were $48,248 after payment of underwriting discounts and commissions of $3,324 and estimated offering expenses payable by Silvercrest of $1,126.

The accompanying Condensed Consolidated Statement of Financial Position as of December 31, 2012, the statements of operations for the three and six months ended June 30, 2013 and 2012, and the statements of cash flows for the six months ended June 30, 2013 and 2012 are those of SLP, the Company’s accounting predecessor. Statements of operations and cash flows of the Company for the period from June 27 to June 30, 2013 have been omitted as all amounts for such period are insignificant.

In connection with the IPO and the reorganization of SLP, Silvercrest and SLP entered into a series of transactions in order to reorganize their capital structures and complete the IPO. The reorganization and IPO transactions included, among others, the following:

 

•

GP LLC (SLP’s general partner prior to the reorganization) distributed all of its interests in SLP to its members on a pro rata basis in accordance with each member’s interest in GP LLC.

 

•

SLP completed a unit distribution of 19.64 Class B partnership units for each outstanding and vested limited partnership unit prior to the consummation of the IPO which resulted in 10,000,000 outstanding Class B units;

 

•

GP LLC transferred its rights as general partner of SLP to Silvercrest, which became the sole general partner of SLP, and GP LLC was dissolved thereafter;

 

•

The partnership agreement of SLP was amended, effective as of the consummation of the IPO, to eliminate the call and put rights of SLP and its partners, respectively upon a partner’s death, or, if applicable, termination of employment, which required all limited partner’s units to be classified as temporary equity in SLP’s Consolidated Financial Statements;

 

•

For each Class B unit of SLP, Silvercrest issued one share of Class B common stock to the holders of Class B units of SLP, in exchange for its par value which was funded by SLP;

 

•

Silvercrest entered into a tax receivable agreement with each limited partner of SLP to return 85% of the tax benefits, estimated to be $3,734, that it receives as a result of its ability to step up its tax basis in the partnership units of SLP that it acquired from partners of SLP;

 

•

A special distribution by SLP of $10,000 was made to its existing partners prior to the consummation of the IPO, of which $7,000 was funded by borrowing under a credit facility with City National Bank; this special distribution, which was paid in July 2013, was treated as an equity transaction and was accrued and recorded in “Accounts payable and accrued expenses” as of June 30, 2013;

 

•

A special bonus payment by SLP was made to non-principals of $754 which was paid in July 2013, and was recorded as compensation expense and was accrued in “Accrued compensation” as of June 30, 2013;

 

•

Partner incentive distributions earned for the six months ended June 30, 2013 were treated as an equity transaction and were accrued in “Accrued compensation” as of June 30, 2013; and

 

•

The purchase of 3,540,684 Class B units from partners of SLP at an offering price of $11.00 per unit, as adjusted for underwriting discounts and commissions of $2,457 and estimated offering expenses of $1,126, resulting in net proceeds of $35,365 to the selling partners. The Class B units acquired by Silvercrest were converted into Class A units of SLP.

Modification of Units of SLP

As part of the reorganization, the limited partner units of SLP were modified. The following modifications were made to the Class B units:

The Class B units (previously limited partnership units) of SLP, which are held by employee-partners, were modified to eliminate a cash redemption feature. Prior to the reorganization, the terms of the limited partnership units included call and put rights to redeem the units from a holder whose employment by SLP had been terminated. As a result of the redemption feature, SLP was required to account for the limited partnership units held by employee-partners as temporary equity. At the time of the reorganization and as a result of the elimination of the redemption feature, SLP reclassified the redeemable equity of its limited partners to permanent equity. Any deferred equity units that were unvested at the time of the reorganization will continue to be reflected as share-based payment awards and will be expensed as compensation over the remaining vesting period (see Note 16, “Equity-based Compensation”).

 

Tax Receivable Agreement

In connection with the IPO and reorganization of SLP, Silvercrest entered into a tax receivable agreement (the “TRA”) with the partners of SLP that will require it to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that it actually realizes (or is deemed to realize in the case of an early termination payment by it, or a change in control) as a result of the increases in tax basis and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. This will be Silvercrest’s obligation and not the obligation of SLP. Silvercrest expects to benefit from the remaining 15% of cash savings, if any, realized.

The TRA was effective upon the consummation of the IPO and will continue until all such tax benefits have been utilized or expired, unless Silvercrest exercises its right to terminate the TRA for an amount based on an agreed upon value of the payments remaining to be made under the agreement. The TRA will automatically terminate with respect to Silvercrest’s obligations to a partner if a partner (i) is terminated for cause, (ii) breaches his or her non-solicitation covenants with Silvercrest or any of its subsidiaries or (iii) voluntarily resigns or retires and competes with Silvercrest or any of its subsidiaries in the 12-month period following resignation of employment or retirement, and no further payments will be made to such partner under the TRA.

For purposes of the TRA, cash savings in income tax will be computed by comparing Silvercrest’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase in its share of the tax basis of the tangible and intangible assets of SLP.

Estimating the amount of payments that Silvercrest may be required to make under the TRA is imprecise by its nature, because the actual increase in its share of the tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:

 

•

the timing of exchanges of Class B units for shares of Silvercrest’s Class A common stock—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable and amortizable assets of SLP at the time of the exchanges;

 

•

the price of Silvercrest’s Class A common stock at the time of exchanges of Class B units—the increase in Silvercrest’s share of the basis in the assets of SLP, as well as the increase in any tax deductions, will be related to the price of Silvercrest’s Class A common stock at the time of these exchanges;

 

•

the extent to which these exchanges are taxable—if an exchange is not taxable for any reason (for instance, if a principal who holds Class B units exchanges units in order to make a charitable contribution), increased deductions will not be available;

 

•

the tax rates in effect at the time Silvercrest utilizes the increased amortization and depreciation deductions; and

 

•

the amount and timing of Silvercrest’s income—Silvercrest will be required to pay 85% of the tax savings, as and when realized, if any. If Silvercrest does not have taxable income, it generally will not be required to make payments under the TRA for that taxable year because no tax savings will have been actually realized.

In addition, the TRA provides that, upon certain mergers, asset sales, other forms of business combinations or other changes of control, Silvercrest’s (or its successors’) obligations with respect to exchanged or acquired Class B units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that Silvercrest would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the TRA.

Decisions made by the continuing partners of SLP in the course of running Silvercrest’s business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by an exchanging or selling principal under the TRA. For example, the earlier disposition of assets following an exchange or acquisition transaction will generally accelerate payments under the TRA and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s tax liability without giving rise to any rights of a principal to receive payments under the TRA.

 

Were the Internal Revenue Service to successfully challenge the tax basis increases described above, Silvercrest would not be reimbursed for any payments previously made under the TRA. As a result, in certain circumstances, Silvercrest could make payments under the TRA in excess of its actual cash savings in income tax.

IPO and Use of Proceeds

The net proceeds from the IPO were $48,248. Silvercrest used a portion of the IPO net proceeds to purchase 3,540,684 Class B units of SLP from certain of its partners for $35,365.

Silvercrest intends to use the remaining proceeds for general corporate purposes.

The Condensed Consolidated Statement of Financial Condition as of June 30, 2013 reflects a receivable for the net proceeds from the sale of the Class A common stock and a payable for the amount due for the purchase of the Class B units from the partners of SLP. The net proceeds from the sale of the Class A common stock was received and the amount due for the purchase of the Class B units was disbursed on July 2, 2013.

Pro Forma Statements of Operations Information (unaudited)

Pro forma income taxes

Silvercrest is subject to federal, state and local income tax upon completion of its initial public offering.

The pro forma income tax provision presents SLP’s results from operations as if it were subject to federal, state and local income tax. However, only a portion of SLP’s units were purchased in connection with the Silvercrest IPO, therefore only a portion of the Company’s earnings will be taxed at Silvercrest’s statutory corporate income tax rate of 40%. The Company anticipates that its actual consolidated effective tax rate will be lower than 40% and is dependent upon the number of units purchased in connection with its IPO.

Earnings per unit

In connection with the reorganization of SLP and the IPO, SLP completed a unit distribution of 19.64 units for each unit outstanding as of the date of the consummation of the initial public offering.

Weighted average units outstanding reflect the unit distribution that occurred on June 27, 2013.

Three months ended June 30, 2013:

Basic weighted average units outstanding:

 

Incremental units (1)			592,455
Basic weighted average units outstanding			10,316,636
Total pro forma units for purposes of calculating pro forma basic net income per unit			10,909,091

 

(1)	Represents incremental units which are assumed to fund the cash distributions to partners as such cash distributions exceed current year pro forma earnings.

 

Distribution to be made prior to the closing of the offering		$	10,000,000
Pro forma net income			3,483,000
Distributions in excess of pro forma net income		$	6,517,000
IPO offering price		$	11.00
Incremental units			592,455

 

Diluted weighted average units outstanding:

 

Incremental units			592,455
Diluted weighted average units outstanding (2)			10,553,726
Total pro forma diluted units for purposes of calculating pro forma net income per unit			11,146,181

 

(2)	Includes 237,089 performance units which are conditionally issuable units that would be issuable if June 30, 2013 was the end of the contingency period.

Six months ended June 30, 2013:

Basic weighted average units outstanding:

 

Incremental units (1)			276,582
Basic weighted average units outstanding			10,421,071
Total pro forma units for purposes of calculating pro forma basic net income per unit			10,697,653

 

(1)	Represents incremental units which are assumed to fund the cash distributions to partners as such cash distributions exceed current year pro forma earnings.

 

Distribution to be made prior to the closing of the IPO		$	10,000,000
Pro forma net income			6,957,600
Distributions in excess of pro forma net income		$	3,042,400
IPO offering price		$	11.00
Incremental units			276,582

Diluted weighted average units outstanding:

 

Incremental units			276,582
Diluted weighted average units outstanding (2)			10,658,161
Total pro forma diluted units for purposes of calculating pro forma net income per unit			10,934,743

 

(2)	Includes 237,089 performance units which are conditionally issuable units that would be issuable if June 30, 2013 was the end of the contingency period.

Diluted weighted average units outstanding for the three and six months ended June 30, 2012 includes 146,452 performance units which are conditionally issuable units that would be issuable if June 30, 2013 was the end of the contingency period.